E X C E L L E N C E B Y D E S I G N
First Bancorp
Annual Report
2015
0 2
I N N O V A T I O N
& T E C H N O L O G Y
0 4
A F R E S H ,
N E W A P P R O A C H
0 6
C E L E B R A T I N G
8 0 Y E A R S
E XC EL LENCE BY DE SIGN
Selected Financial Data
Years Ended December 31
($ in thousands except share data)
2015
2014
C H A N G E 2014
T O 2015
S E L E C T E D I N C O M E S T A T E M E N T D A T A
Net interest income
Provision (reversal) for loan losses
Noninterest income
Noninterest expenses
Income taxes
Net income
Preferred stock dividends
Net income - common shareholders
P E R S H A R E D A T A
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 E L E C T E D B A L A N C E S H E E T D A T A
(at year end)
Assets
Loans
Deposits
Shareholders’ Equity
P E R F O R M A N C E R A T I O S
Return on average assets
Return on average common equity
N O N F I N A N C I A L D A T A
Common shares outstanding
Number of branches
Number of employees - full/part time
n/m = not meaningful.
-9.0%
n/m
30.6%
0.9%
4.4%
8.2%
-30.5%
9.5%
9.8%
9.2%
0.0%
1.4%
-3.5%
1.5%
5.5%
7.4%
4.5%
5.1%
4.3%
-11.7%
7 bps
31 bps
$ 119,747
(780)
18,764
98,131
14,126
27,034
603
26,431
$ 1.34
1.30
0.32
19.92
15.00
18.74
16.96
13.56
131,609
10,195
14,368
97,251
13,535
24,996
868
24,128
1.22
1.19
0.32
19.65
15.55
18.47
16.08
12.63
$ 3,362,065
2,518,926
2,811,285
342,190
3,218,383
2,396,174
2,695,906
387,699
0.82%
8.04%
0.75%
7.73%
19,747,509
19,709,881
88
783/57
87
770/55
Selected Financial Data
SH AREH OLDE R LETTER
Dear Shareholders,
Customers and Friends,
I am pleased to have the opportunity to report on another successful year for
our Company. In 2015, we recorded our third consecutive year of earnings
growth of more than 9%, while also achieving favorable trends in other key
areas of our business.
In 2015, we earned $26.4 million, or $1.30 per diluted common share,
which was a 9.5% increase compared to the $24.1 million, or $1.19 per
diluted common share, earned in 2014. The earnings for 2014 were 21.8%
higher than in 2013, and thus the Company has experienced an increase in
earnings of over 30% over the past two years. Favorable declines in losses
on loans and foreclosed properties and good overhead expense control
more than offset a challenging interest rate environment. We experienced
nice increases in our loan and deposit balances in 2015, while our level of
nonperforming assets improved significantly during the year. Our earnings
represented a 0.82% return on average assets, which is a six-year high.
In 2015, our Company’s share price rose for the fourth consecutive year and
closed the year at a price of $18.74, a 1.5% increase from December 31,
2014. This increase follows three years in which the Company’s share price
rose by an average of 18% per year. We also continued our streak of paying
dividends every year since becoming a public company in 1987. The $0.32
dividend rate paid on each share of stock added an additional 1.8% to
overall shareholder return in 2015, resulting in a 3.3% total return for the year.
Since December 31, 2015, the overall stock market has declined significantly,
with the banking industry having been hit especially hard. Fortunately, the
price of our common stock has held up well and as of the date of this
writing (March 8, 2016), our stock price has significantly outperformed
banking indices.
In 2015, we experienced success from several initiatives to grow loan
balances. Total loans at December 31, 2015 amounted to $2.52 billion, an
increase of $123 million, or 5.1%, from the $2.40 billion outstanding a year
earlier. Loan growth was especially strong in the second half of the year with
annualized growth of 8.8%. During the year, several seasoned lenders joined
our bank, and we expanded into higher growth markets, which I will discuss
more below. And I also believe that internal initiatives focused on training
and our “Promise to Service Excellence” commitment, also discussed below,
contributed to this growth.
These same initiatives played a part in the deposit growth we experienced
in 2015. For the year, total deposits increased by $115 million, or 4.3%, and
amounted to $2.81 billion at year end. We also experienced a favorable shift
– 0 1 –
Richard H. Moore
C E O F I R S T B A N C O R P
In 2015, we
experienced
success from
several initiatives
to grow loan
balances.
Innovation &
Technology
New Digital Banking
Experience
New tools and technologies
let customers handle many
of their banking tasks simply
and easily from a smartphone,
tablet or personal computer.
Our free, downloadable
mobile app lets iPhone
and Android users manage
their business and personal
banking on the go.
Customers can manage
account activity, check
statements, set alerts, pay bills
online from anywhere, locate
branches, deposit checks by
sending in a photo and much,
much more.
New Intranet Website
We’ve launched a new, secure
internal intranet that provides
insights and perspective in
real time, greatly simplifying
and accelerating how First
Bank business gets done.
in the composition of our deposits, with transaction accounts increasing by
$236 million, or 12.6%, and time deposits declining by $121 million, or 14.7%.
Transaction accounts are generally our lowest cost funding source, whereas
time deposits typically have higher interest rates and thus cost us more.
This favorable change in mix contributed to our total funding cost declining
from an already low 0.29% in 2014 to 0.24% in 2015. We believe that our core
deposit base is one of the most valuable parts of our franchise that will really
benefit our Company when interest rates eventually rise.
The improvement in our funding cost helped minimize the impact of net
interest margin pressure, which is a challenge being experienced by the
entire banking industry. With interest rates continuing to hold at historic
lows, it is difficult for banks to reinvest customer deposits at acceptable
spreads. While we are not immune to this, our low cost of funds and close
management attention to this area have helped minimize the impact on
our Company. Our net interest margin (tax equivalent net interest income
divided by average earning assets) amounted to 4.13% in 2015 compared
to 4.58% in 2014. While it declined in 2015, our strong net interest margin
remains well above peer averages and is a significant driver of our overall
profitability.
In 2015, we also concluded a successful partnership with the government
called the Small Business Lending Fund (SBLF). In 2011, in response to a
sluggish economy, the U.S. Treasury introduced the SBLF program to help
provide economic stimulus. The SBLF was made available to healthy banks
with total assets of less than $10 billion. Participating banks were permitted
to issue preferred stock to the Treasury with dividend rates that were
temporarily tied to the bank’s increase in lending to small businesses in the
country. In August 2011, we issued $63.5 million of preferred stock to the
Treasury and then followed through by increasing our loans to small business
by over 15%, which allowed us to pay the lowest possible dividend rate of
1%. Consistent with the temporary nature of this program, our dividend rate
was set to increase to 9% in March 2016. Our intent had always been
to redeem the SBLF preferred stock prior to that increase, and we did
so in 2015.
Now I would like to discuss several strategic initiatives.
Our bank was born in the rural market of Troy, North Carolina in 1935, and
we are proud to serve many similar markets throughout our footprint. We
also believe First Bank is the ideal bank to serve larger and higher growth
markets because we know there are significant segments of those markets
that desire to do their business with a high-quality, high-touch community
bank. In that regard, our recent branch expansion has been focused on
larger, higher growth markets, which I will now discuss.
– 0 2 –
First Bank is the ideal bank to serve larger and higher
growth markets because we know there are significant
segments of those markets that desire to do their
business with a high-quality, high-touch community bank.
– 0 3 –
– 0 3 –
A New, Fresh
Approach
Branch Design
At First Bank we’re taking a
fresh approach to branch design
with innovations both technical
and tactile. We’re experimenting
with the elimination of
traditional teller lines and
establishing work stations, or
“pods,” where associates can
engage and collaborate more
efficiently with customers,
allowing a more private,
personal interaction.
We’ve also installed a new
technology center that lets
customers experience and
become more familiar with
our latest digital offerings.
These advances are enabled
by updated electronics
infrastructure which will permit
our branches to evolve to the
next generation of banking
technologies as they emerge.
Finally, the overall space has
been warmed by the installation
of art displays depicting the
work of local photographers.
New Markets
In 2015, we opened a full service branch in Fayetteville, North Carolina.
Fayetteville is the sixth largest city in North Carolina and is close to our
Southern Pines headquarters. Fayetteville’s economy is strong and we
opened our branch there in October 2015 with seasoned bankers in place.
This branch is already increasing market share, and it should provide
the foundation for future growth in that area.
In the second half of 2015, we recommitted to the Charlotte market.
Charlotte is by far the largest city in North Carolina. Several years ago we
had established a small presence there. But in the second half of 2015, we
made the decision to more fully commit to this important market and began
that initiative with the hiring of an experienced Charlotte banker. We are
currently putting the final pieces in place to open a full service branch in
Charlotte and expect to announce an opening date soon.
In January 2016, we announced that five experienced bankers had joined
First Bank from a local community bank competitor that had recently
announced it was being acquired. These bankers are local to the Raleigh,
Greensboro and Winston-Salem markets, which are the second, third and
fifth largest cities in North Carolina, respectively. The lift-out of a team like
this typically shortens the amount of time it takes to become profitable in
new markets, and we expect that to be the case here.
And just recently, in a move that builds significantly on the bank team I just
discussed, we announced an agreement to exchange our seven Virginia
branches for six North Carolina branches of First Community Bank, which is a
community bank with a large Virginia presence. Four of the six branches we
expect to assume are in Winston-Salem, with the other two branches located
in the Charlotte-metro markets of Mooresville and Huntersville. We entered
Virginia in 2001 with a branch in Wytheville and had grown that presence to
a total of seven branches. Our Virginia market has been good for us, and we
thank our employees for their service and our customers there for the privilege
to serve them. However the distant proximity to our core market and the
opportunity to assume what is essentially a banking franchise in markets where
we have recently invested in human capital made this the right move for us.
If you go inside one of our newest branches, you will notice a teller “pod”
design instead of the traditional teller line. This new approach replaces the
teller counter with pods where customers stand side-by-side with tellers
rather than opposite them behind a counter. The teller pods create an open
and friendly transaction environment with a more personal feel. We currently
have this design in our Fayetteville and Jacksonville branches. Based on the
positive feedback we have received, we are beginning to remodel other
branches into this design.
– 0 4 –
In December, we were very pleased to announce an agreement to acquire Bankingport, Inc., an insurance agency located
in Sanford, North Carolina. This transaction was completed on January 1, 2016. Bankingport, Inc. was founded in 1948
and became a well-respected insurance agency with a great reputation for excellent customer service. By combining
Bankingport with our existing agency, First Bank Insurance Services, we expect to achieve economies of scale and to
provide a larger platform for leveraging insurance services throughout our bank network. Growing areas of noninterest
income has been a goal for the Company, and this transaction helps achieve that goal.
In addition to physical expansion, we continue to invest in technology. While we believe a physical presence is necessary to
initially attract customers and to provide them with certain services, we also know that most of our customers use online
banking to conduct many of their banking needs. We refer to our online banking presence as “digital banking.” Our digital
banking product allows customers to initiate most any bank transaction in an intuitive manner from their phone or
computer. Our mobile check deposit feature, which allows you to deposit a check by simply taking a picture of it, has
quickly become one of the most popular features. We will continue to remain on the leading edge of online technology.
As our customers continue to evolve, so will we. Our challenge is to provide the same level of personal service no matter
which channel our customers choose to do their banking. We believe this is a challenge community banks are uniquely
positioned to meet.
Service Excellence
Providing our customers the best possible service is what we strive for to differentiate our bank. In 2015, we continued our
“Promise to Service Excellence” commitment. The mission of our Promise to Service Excellence is contained in this purpose
statement: “We help our customers realize their dreams by providing financial solutions and building trusted relationships.”
We have ongoing training dedicated to this mission for all employees. This training is based on a foundation of safety and
soundness, and it emphasizes knowledge and accuracy in everything we do, courteous service, and providing the highest
level of convenience for our customers. As employees, we are energized and are making our customers’ dreams come true.
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 our original home of Troy, North Carolina at 10:00AM
on May 12, 2016. 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.
Your support is appreciated and I welcome your comments and suggestions.
Sincerely,
Richard H. Moore
C H I E F E X E C U T I V E O F F I C E R
M A R C H 8 , 2 0 1 6
– 0 5 –
Remembering 80 years of First Bank
We are honored to have been a part of the lives of our communities for the
past 80 years. We thank our customers for the opportunity to be of service,
and we look forward to the privilege of serving our communities in the future.
Richard Moore CEO of First Bancorp, 2012 to present
1935
First Bank opened as
Bank of Montgomery
with its first branch in
Troy, North Carolina.
1985
The bank changed its name to
First Bank as it began to serve
communities outside of
Montgomery County.
1987
First Bancorp (FBNC) was
first traded publicly on the
NASDAQ market.
2000
Merged with First Savings
Bancorp — $330 million in assets.
2002
First Bank opened its first
branch in Wake County, NC.
– 0 6 –
CEL EBRAT ING 8 0 YEARS
Looking toward the future
R A L E I G H M A R K E T E X PA N S I O N
W I T H A B U I L D E R F I N A N C E T E A M
M E T R O T R I A D M A R K E T
E X PA N S I O N W I T H C O M M E R C I A L
L E N D I N G A N D F I N A N C I A L
S E R V I C E S T E A M S
2003
First Bank entered South
Carolina when it merged with
Carolina Community Bank
and acquired three branches
in Dillon County.
2009
First Bank acquired
Cooperative Bank, adding
18 branches in North Carolina
and South Carolina with
assets of $974 million.
2013
First Bank headquarters
moved to Southern Pines, NC.
2014
Opened new branch in
Fuquay-Varina, NC.
2015
– 0 7 –
Launched mobile check
deposit. Opened new
branches in Jacksonville, NC
and Fayetteville, NC.
BO ARD O F D IRECTORS
Daniel T. Blue, Jr.
Mary Clara Capel
James C. Crawford, III
C H A I R M A N F I R S T B A N C O R P
Richard H. Moore
Thomas F. Phillips
O. Temple Sloan, III
C E O F I R S T B A N C O R P
Frederick L. Taylor, II
Virginia C. Thomasson
Dennis A. Wicker
– 0 8 –
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, 2015
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)
28387
(Zip Code)
Registrant’s telephone number, including area 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, 2015 as reported by The NASDAQ Global Select Market, was approximately $311,995,897.
The number of shares of the registrant’s Common Stock outstanding on February 29, 2016 was 19,750,969.
Portions of the Registrant’s Proxy Statement to be filed pursuant to Regulation 14A are incorporated herein by reference into Part
III.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Forward-Looking Statements
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Begins on
Page(s)
4
4
20
30
30
30
30
Item 5
Market for Registrant’s Common Stock, Related Shareholder Matters, and
31, 75
Issuer Purchases of Equity Securities
Item 6
Item 7
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
33, 75
PART II
Operations
Overview – 2015 Compared to 2014
Overview – 2014 Compared to 2013
Outlook for 2016
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
34
37
39
40
42
42
47, 76
49, 86
50, 77
52, 78
54, 78
54
56, 79
57, 79
59, 81
60, 83
64, 85
65, 88
66
67, 90
69, 92
71
71, 91
72, 89
74
74
74
94
95
96
Item 7A
Item 8
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2015
Consolidated Statements of Comprehensive Income for each of the years in
the three-year period ended December 31, 2015
Consolidated Statements of Shareholders’ Equity for each of the years in the
97
three-year period ended December 31, 2015
2
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2015
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
PART IV
Exhibits and Financial Statement Schedules
SIGNATURES
Begins on
Page(s)
98
99
156
75
93
159
159
160
160
160
160
160
160
161
165
*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s definitive
Proxy Statement for the 2016 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 29, 2016.
3
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, 2015 and 2014.
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, 2015,
we conducted business from 88 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 Greenville, North Carolina and Charlotte, North Carolina. Of the Bank’s
88 branches, 75 branches are in North Carolina, six branches are in South Carolina and seven branches are in
Virginia (where we operate under the name “First Bank of Virginia”). Ranked by assets, the Bank was the sixth
largest bank headquartered in North Carolina as of December 31, 2015.
As of December 31, 2015, 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.
4
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. We also offer a mobile check deposit feature for our mobile banking customers that allows them
to securely deposit checks via their smartphone. 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,
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 and
the primary activity of First Bank Insurance became the placement of property and casualty insurance products.
On January 1, 2016, First Bank Insurance acquired Bankingport, Inc., an insurance agency based in Sanford,
North Carolina, which provides First Bank Insurance with economies of scale and a larger platform for leveraging
insurance services throughout the First Bank branch network.
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
5
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%.
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 2015, 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, 2015, 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, 2015, our approximate deposit market share at June 30, 2015, and the number of bank
competitors located in the county at June 30, 2015.
County
Anson, NC
Beaufort, NC
Bladen, NC
Brunswick, NC
Buncombe, NC
Cabarrus, NC
Carteret, NC
Chatham, NC
Chesterfield, SC
Columbus, NC
Cumberland, 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
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
2
1
4
3
2
2
2
1
2
1
1
2
3
3
2
1
3
2
3
4
3
10
5
2
3
2
1
4
1
1
2
4
2
1
2
-
88
Deposits
(in millions)
$ 13
46
26
113
86
38
36
64
43
38
4
20
88
67
132
38
70
106
33
161
118
66
462
143
45
74
42
5
182
25
69
69
96
32
19
66
76
$ 2,811
6
Market
Share
5.3%
4.8%
9.4%
6.6%
1.8%
1.9%
3.2%
9.6%
12.4%
5.0%
0.0%
2.0%
3.2%
24.3%
16.7%
1.6%
0.7%
11.8%
1.3%
22.5%
39.2%
3.9%
25.5%
2.9%
3.9%
4.8%
10.8%
0.4%
19.1%
2.7%
4.4%
21.1%
10.5%
0.1%
1.7%
11.5%
Number of
Competitors
4
7
5
11
16
11
8
10
6
5
14
9
10
3
6
12
20
9
20
9
2
13
10
18
10
12
5
12
9
10
13
6
6
30
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
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,
Fayetteville, Jacksonville, 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 a loan production office in
Greenville, North Carolina, and in the second half of 2015, we established a loan production office in Charlotte,
North Carolina. In early 2016, in connection with the hiring of five bankers from a local community bank
competitor, we established loan production offices in Greensboro and Raleigh, North Carolina. These are new,
yet contiguous, markets to our branch footprint, and are consistent with our recent branch expansion strategy
of focusing on larger, higher growth markets.
In March 2016, we announced we had reached an agreement to exchange our seven bank branches located in
Virginia for six North Carolina bank branches of a community bank that is headquartered in Virginia, with a
similar amount of loans and deposits. Four of the six branches we expect to assume are in Winston-Salem, with
the other two branches being in the Charlotte-metro markets of Mooresville and Huntersville. According to the
agreement, it is expected that substantially all deposits and certain loans assigned to the branches will
transfer. Currently, our branches in Virginia have approximately $150 million in deposits, while the branches we
expect to assume have approximately $130 million in deposits. It is estimated that the amount of loans that will
be transferred between the two banks will be up to $175 million. We entered Virginia in 2001 with a branch in
Wytheville and had grown that presence to a total of seven branches. The distant proximity to our core market
and the opportunity to assume what is essentially a banking franchise in markets where we have recently
invested in human capital were the primary factors we considered in entering into the exchange agreement.
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 our Company, 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. With interest
rates on investment securities at historic lows and banks of all sizes attempting to maximize yields on earning
assets, the competition for high-quality loans has become intense. Accordingly, loan rates in our markets are
under competitive pressure. The pricing competition for deposits has lessened, but at any given time in many of
our markets, there are frequently 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
7
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. We are
also able to originate significantly larger loans than many of our smaller bank competitors. At the same time, we
attempt to maintain a banking culture associated with smaller banks – a culture that has a personal and local
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. We have
seven senior lending officers that have authority to approve secured loans up to $500,000 and each of our three
Regional Presidents has authority to approve secured loans up to $1,000,000. Loans up to $3,000,000 are
approved by the Bank’s Regional Credit Officers through our Credit Administration Department. The Bank’s
Chief Credit Officer has authority to approve loans up to $6,000,000, while the Chief Credit Officer and the
Bank’s President have joint authority to approve loans up to $8,000,000. The Bank’s board of directors
maintains loan authority up to the Bank’s in-house limit of $25,000,000 and generally approves loans through its
Executive Loan Committee. All lending authorities are based on the borrower’s Total Credit Exposure (“TCE”),
which is an aggregate of the Bank’s lending relationship to the borrower. TCE is based on the borrower’s total
credit exposure with the Bank either directly or indirectly through loan guarantees or other borrowing entities
related to the borrower through control or ownership.
The Executive Loan Committee 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 the Credit Administration Department.
We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action.
Lending and credit administration 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
8
established parameters of past due status, the Bank’s Asset Resolution Group assumes the management of the
loan, and in some cases we engage a third-party firm to assist in collection efforts.
The Bank has an internal Loan Review Department that conducts on-going and targeted reviews of the Bank’s
loan portfolio and assesses the Bank’s adherence to loan policies, risk grading and accrual policies. Reports are
generated for management based on these activities and findings are used to adjust risk grades as deemed
appropriate. In addition, these reports are shared with the Company’s board of directors. The Loan Review
Department also provides training assistance to the Bank’s Training and Credit Administration departments.
To further assess the Bank’s loan portfolio and as a secondary review of the Bank’s Loan Review Department, 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. 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. We may also invest up to $60 million in time deposits with other financial
institutions. Time deposit purchases from any one financial institution exceeding FDIC insurance coverage limits
are evaluated as a corporate bond and are subject to the same due diligence requirements as corporate bonds
(described below).
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 that are not rated investment grade will not be
purchased. 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 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
9
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
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 the Company’s
2011 Annual Report on Form 10-K for more information on this acquisition.
The following paragraphs describe the other acquisitions that we have completed in the past three years.
10
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.
In January 2016, we acquired Bankingport, Inc., an insurance agency based in Sanford, North Carolina. Although
not material to the Company’s consolidated operations, the acquisition provided us with the opportunity to
enhance our product offerings, as well as expand our insurance agency operations into a significant banking
market for our Company. Also this acquisition provides us a larger platform for leveraging insurance services
throughout our bank branch network.
As noted previously, in March 2016, we announced we had reached an agreement to exchange our seven bank
branches located in Virginia for six North Carolina bank branches of a community bank that is headquartered in
Virginia, with a similar amount of loans and deposits. Four of the six branches we expect to assume are in
Winston-Salem, with the other two branches being in the Charlotte-metro markets of Mooresville and
Huntersville. According to the agreement, it is expected that substantially all deposits and certain loans
assigned to the branches will transfer. Currently, our branches in Virginia have approximately $150 million in
deposits, while the branches we expect to assume have approximately $130 million in deposits. It is estimated
that the amount of loans that will be transferred between the two banks will be up to $175 million. We entered
Virginia in 2001 with a branch in Wytheville and had grown that presence to a total of seven branches. The
distant proximity to our core market and the opportunity to assume what is essentially a banking franchise in
markets where we have recently invested in human capital were the primary factors we considered in entering
into the exchange agreement.
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, 2015, we had 783 full-time and 57 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
11
Commissioner of Banks (the “Commissioner”). The Bank is subject to supervision and examination by the
Federal Reserve Board (“FRB”) and the Commissioner. Until April 22, 2015, the Bank was regulated by the
Federal Deposit Insurance Corporation (“FDIC”). Effective April 22, 2015, the Bank became a member of the
Federal Reserve System, and therefore, the FRB replaced the FDIC as the Bank’s primary federal regulator. 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 (“FRB”). It is also subject to examination
by the FRB and is required to obtain FRB approval prior to making certain acquisitions of other institutions or
voting securities. The FRB requires the Company to maintain certain levels of capital - see “Capital Resources
and Shareholders’ Equity” under Item 7 below. The FRB 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 FRB. The FRB 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 FRB 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
12
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
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, under FRB regulations, a dividend cannot be paid by the Bank if it would be less than well-
capitalized after the dividend. The FRB may also prevent the payment of a dividend by the Bank if it determines
that the payment would be an unsafe and unsound banking practice. 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 FRB 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 member bank. The
FRB 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. In addition, the FRB monitors the Bank’s
compliance with several banking statutes, such as the Depository Institution Management Interlocks Act and the
Community Reinvestment Act of 1977.
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 (“SBLF stock”). 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. The initial dividend rate on SBLF 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 provided that the dividend rate remained fixed until March 1, 2016. On March 1, 2016,
the contractual dividend rate was set to increase to 9%. The Company redeemed $32 million of the SBLF stock
in June 2015 and the remaining $31.5 million in October 2015, which ended our participation in the SBLF. 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 up to a maximum amount, which is
currently $250,000 per depositor. 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.
13
We recognized approximately $2.4 million, $4.0 million, and $2.8 million in FDIC insurance expense in 2015,
2014, and 2013, respectively. FDIC insurance expense includes deposit insurance assessments and Financing
Corporation (“FICO”) assessments related to outstanding FICO bonds.
Legislative and Regulatory Developments
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 and 2) Basel III, which are 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;
• 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 established 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 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.
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 because they were issued prior to
May 18, 2010, 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 created 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 has examination and primary enforcement authority with respect to depository institutions
14
with $10 billion or more in assets. Depository institutions with less than $10 billion in assets, such as the Bank,
are 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 authorized the CFPB to establish certain minimum standards for the origination of
residential mortgages, including a determination of the borrower's ability to repay. Among other things, the
rules adopted by the CFPB require banks to: (i) develop and implement procedures to ensure compliance with a
“reasonable ability to repay” test and identify whether a loan meets a new definition for a “qualified mortgage,”
in which case a rebuttable presumption exists that the creditor extending the loan has satisfied the reasonable
ability to repay test; (ii) implement new or revised disclosures, policies and procedures for originating and
servicing mortgages including, but not limited to, pre-loan counseling, early intervention with delinquent
borrowers and specific loss mitigation procedures for loans secured by a borrower's principal residence; (iii)
comply with additional restrictions on mortgage loan originator hiring and compensation; (iv) comply with new
disclosure requirements and standards for appraisals and certain financial products; and (v) maintain escrow
accounts for higher-priced mortgage loans for a longer period of time. It is our policy not to make predatory
loans and to determine borrowers’ ability to repay, but the law and related rules create the potential for
increased liability with respect to our lending and loan investment activities. They increase our cost of doing
business and ultimately, may prevent us from making certain loans and cause us to reduce the average
percentage rate or the points and fees on loans that we do make.
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 attorney generals
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 gave 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. Effective October 1, 2011, the FRB set new caps on interchange fees at $0.21 per
transaction, plus an additional five basis-point charge per transaction to help cover fraud losses. An additional
$0.01 per transaction is allowed if certain fraud-monitoring controls are in place. While we are not directly
subject to these rules 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. Nevertheless, 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 required the federal banking
agencies to establish minimum leverage and risk-based capital requirements for banks and bank holding
companies. These new standards are to 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.
See discussion of the new capital requirements established by the federal banking agencies under “Recent
Amendments to Regulatory Capital Requirement under Basel III” below.
15
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
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 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, including the Bank, 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.
The Volcker Rule. Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” prohibits any bank, bank
holding company, or affiliate (referred to collectively as “banking entities”) from engaging in two types of
activities: “proprietary trading” and the ownership or sponsorship of private equity or hedge funds that are
referred to as “covered funds.” Proprietary trading is, in general, trading in securities on a short-term basis for a
banking entity's own account. Funds subject to the ownership and sponsorship prohibition are those not
required to register with the Securities and Exchange Commission because they have only accredited investors
or no more than 100 investors. In December 2013, our primary federal regulator, the FRB, together with other
federal banking agencies, the FEDIC, the SEC and the Commodity Futures Trading Commission, finalized a
regulation to implement the Volcker Rule. At December 31, 2015, the Company has evaluated our securities
portfolio and has determined that we do not hold any covered funds.
Many of the requirements of the Dodd-Frank Act remain 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.
16
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, such as
the Company and the Bank, and all savings and loan holding companies regardless of asset size. The rules
became effective for institutions with assets over $250 billion and internationally active institutions in January
2014 and became effective for all other institutions 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 were required to maintain Common Equity Tier I Capital equal to 4.5% of risk-
weighted assets starting in 2015.
The regulations also increase the required ratio of Tier I Capital to risk-weighted assets from 4% to 6%
effective January 1, 2015. Tier I Capital consists of Common Equity Tier I Capital plus Additional Tier I
Capital which includes 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) no longer qualifies 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, such as the
Company, 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.
• Changes to Prompt Corrective Action Capital Categories. The Prompt Corrective Action rules, effective
January 1, 2015, incorporated the Common Equity Tier I Capital requirement and raised the capital
requirements for certain capital categories. In order to be adequately capitalized for purposes of the
prompt corrective action rules, a banking organization is now 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 is 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.
• 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
17
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. The capital buffer requirement for the Company
begins to 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.
• Additional Deductions from Capital. Banking organizations are 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 are now not deducted but will be subject to 100% risk weighting. Defined
benefit pension fund assets, net of any associated deferred tax liability, are now 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 are now
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 are now also 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 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 continue to 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 created a new 150% risk-weighting category for nonaccrual loans and loans that are more than 90
days past due and 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 became effective for the Company and the Bank on January 1, 2015.
We believe that both the Company and the Bank would meet all capital adequacy requirements under the fully
phased-in final rules.
See “Capital Resources and Shareholders’ Equity” under Item 7 below for further discussion of regulatory capital
requirements.
18
Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a
supervisory matter, without required formulaic measures. Liquidity risk management has become increasingly
important since the financial crisis. The Basel III liquidity framework requires banks and bank holding companies
to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity
measures historically applied by banks and regulators for management and supervisory purposes, going forward
would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to
ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to
the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash
outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio
(“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking
entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings
of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term
debt as a funding source.
In September 2014, the federal bank regulators approved final rules implementing the LCR for advanced
approaches banking organizations (i.e., banking organizations with $250 billion or more in total consolidated
assets or $10 billion or more in total on-balance sheet foreign exposure) and a modified version of the LCR for
bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach
banking organizations, neither of which would apply to the Company or the Bank. The federal bank regulators
have not yet proposed rules to implement the NSFR or addressed the scope of bank organizations to which it
will apply.
Financial Privacy and Cybersecurity
The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions
to disclose non-public information about consumers to non-affiliated third parties. These limitations require
disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure
of certain personal information to a non-affiliated third party. These regulations affect how consumer
information is transmitted through diversified financial companies and conveyed to outside vendors. In
addition, consumers may also prevent disclosure of certain information among affiliated companies that is
assembled or used to determine eligibility for a product or service, such as that shown on consumer credit
reports and asset and income information from applications. Consumers also have the option to direct banks
and other financial institutions not to share information about transactions and experiences with affiliated
companies for the purpose of marketing products or services.
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement
indicates that financial institutions should design multiple layers of security controls to establish lines of defense
and to ensure that their risk management processes also address the risk posed by compromised customer
credentials, including security measures to reliably authenticate customers accessing Internet-based services of
the financial institution. The other statement indicates that a financial institution’s management is expected to
maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and
maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial
institution is also expected to develop appropriate processes to enable recovery of data and business operations
and address rebuilding network capabilities and restoring data if the institution or its critical service providers
fall victim to this type of cyber-attack. First Bancorp has multiple Information Security Programs that reflect the
requirements of this guidance. If, however, we fail to observe the regulatory guidance in the future, we could be
subject to various regulatory sanctions, including financial penalties.
19
Neither the Company nor the Bank can predict what other legislation might be enacted or what other
regulations or assessments might be adopted.
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.
Unfavorable economic conditions could adversely affect our business.
Our business is subject to periodic fluctuations based on national, regional and local economic conditions. These
fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on our
operations and financial condition. Our banking operations are locally oriented and community-based. Our
retail and commercial banking activities are primarily concentrated within the same geographic footprint. Our
markets include most of North Carolina, the southwest area of Virginia and parts of South Carolina. Worsening
economic conditions within our markets could have a material adverse effect on our financial condition, results
of operations and cash flows. Accordingly, we expect to continue to be dependent upon local business
conditions as well as conditions in the local residential and commercial real estate markets we serve.
Unfavorable changes in unemployment, real estate values, interest rates and other factors could weaken the
economies of the communities we serve. In recent years, economic growth and business activity across a wide
range of industries has been slow and uneven and there can be no assurance that economic conditions will
continue to improve, and these conditions could worsen. In addition, oil price volatility, the level of U.S. debt
and global economic conditions have had a destabilizing effect on financial markets. Weakness in any of our
market areas could have an adverse impact on our earnings, and consequently our financial condition and
capital adequacy.
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, 2015 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
20
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 is currently trading 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.
New capital rules that were recently issued generally require insured depository institutions and their holding
companies to hold more capital. The impact of the new rules on our financial condition and operations is
uncertain but could be materially adverse.
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 new rules substantially amended the regulatory
risk-based capital rules applicable to us. The rules became effective on January 1, 2015 for the Company and the
Bank and will be fully phased in by January 1, 2019.
The rules include certain new and higher risk-based capital and leverage requirements than those previously in
place. Specifically, the following minimum capital requirements apply to us at December 31, 2015:
• a new common equity Tier 1 risk-based capital ratio of 4.5% (fully phased-in requirement of 7%);
• a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement; fully phased-in
requirement of 8.5%);
• a total risk-based capital ratio of 8% (unchanged from the former requirement; fully phased-in
requirement of 10%); and
• a leverage ratio of 4% (also unchanged from the former requirement).
In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on
certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in
nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures,
and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.
In addition, in the current economic and regulatory environment, bank regulators may impose capital
requirements that are more stringent than those required by applicable existing regulations. The application of
more stringent capital requirements for us could, among other things, result in lower returns on equity, require
the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such
requirements. Implementation of changes to asset risk weightings for risk-based capital calculations, items
included or deducted in calculating regulatory capital or additional capital conservation buffers, could result in
management modifying our business strategy and could limit our ability to make distributions, including paying
dividends or buying back our shares.
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
21
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 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.
The Dodd-Frank Act also created the Consumer Financial Protection Bureau (CFPB) 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 CFPB 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
22
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 addition, the measure of our allowance for loan losses is dependent on the adoption of new accounting
standards. The Financial Accounting Standards Board recently issued a proposed Accounting Standards Update
that presents a new credit impairment model, the Current Expected Credit Loss ("CECL") model, which would
require financial institutions to estimate and develop a provision for credit losses at origination for the lifetime
of the loan, as opposed to reserving for probable incurred losses up to the balance sheet date. Under the CECL
model, credit deterioration would be reflected in the income statement in the period of origination or
acquisition of the loan, with changes in expected credit losses due to further credit deterioration or
improvement reflected in the periods in which the expectation changes. Accordingly, the CECL model could
require financial institutions like the Bank to increase their allowances for loan losses. Moreover, the CECL
model likely would create more volatility in our level of allowance for loan losses.
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
23
could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory
standards.
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.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti‑money
laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001 (which we refer to as the “Patriot Act”) and other laws and
regulations require financial institutions, among other duties, to institute and maintain effective anti-money
laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal
Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank
Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and
has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well
as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also
increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators also
have begun to focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If our
policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial
institutions that we have already acquired or may acquire in the future are deficient, we would be subject to
liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the
necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our
acquisition plans, which would negatively impact our business, financial condition and results of operations.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing
could also have serious reputational consequences for us.
Federal, state and local consumer lending laws restrict our ability to originate certain mortgage loans and
increase our risk of liability with respect to such loans and increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices
considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable
products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a
reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the
underlying property. Over the course of 2013, the CFPB issued several rules on mortgage lending, notably a rule
requiring all home mortgage lenders to determine a borrower’s ability to repay the loan. Loans with certain
terms and conditions and that otherwise meet the definition of a “qualified mortgage” may be protected from
liability to a borrower for failing to make the necessary determinations. We may find it necessary to tighten our
mortgage loan underwriting standards in response to the CFPB rules, which may constrain our ability to make
loans consistent with our business strategies. It is our policy not to make predatory loans and to determine
borrowers’ ability to repay, but the law and related rules create the potential for increased liability with respect
to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may
prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees
on loans that we do make.
24
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to
material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair
Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of
Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations.
Private parties may also have the ability to challenge an institution’s performance under fair lending laws in
private class action litigation. A successful challenge to our performance under the fair lending laws and
regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide
variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief,
imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could
negatively impact our reputation, business, financial condition and results of operations.
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.
We could experience a loss due to competition with other financial institutions.
We face substantial competition in all areas of our operations from a variety of different competitors, both
within and beyond our principal markets, many of which are larger and may have more financial resources. Such
competitors primarily include national, regional and internet banks within the various markets in which we
operate. We also face competition from many other types of financial institutions, including, without limitation,
savings and loans, credit unions, finance companies, brokerage firms, insurance companies and other financial
intermediaries. The financial services industry could become even more competitive as a result of legislative
and regulatory changes and continued consolidation. In addition, as customer preferences and expectations
continue to evolve, technology has lowered barriers to entry and made it possible for nonbanks to offer
products and services traditionally provided by banks, such as automatic transfer and automatic payment
systems. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding
company, which can offer virtually any type of financial service, including banking, securities underwriting,
insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to
entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as
automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory
constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able
to achieve economies of scale and, as a result, may offer a broader range of products and services as well as
better pricing for those products and services than we can.
Our ability to compete successfully depends on a number of factors, including, among other things:
•
•
the ability to develop, maintain, and build upon long‑term customer relationships based on top quality
service, high ethical standards, and safe, sound assets;
the ability to expand our market position;
25
•
•
•
•
the scope, relevance, and pricing of products and services offered to meet customer needs and
demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could
adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial
condition and results of operations.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions
of new technology-driven products and services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce costs. Our future success depends, in
part, upon our ability to address the needs of our customers by using technology to provide products and
services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many
of our competitors have substantially greater resources to invest in technological improvements. We may not
be able to effectively implement new technology-driven products and services or be successful in marketing
these products and services to our customers. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse impact on our business and, in turn, our
financial condition and results of operations.
New lines of business or new products and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing
lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in
instances where the markets are not fully developed. In developing and marketing new lines of business and/or
new products and services, we may invest significant time and resources. Initial timetables for the introduction
and development of new lines of business and/or new products or services may not be achieved and price and
profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive
alternatives, and shifting market preferences, may also impact the successful implementation of a new line of
business and/or a new product or service. Furthermore, any new line of business and/or new product or service
could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully
manage these risks in the development and implementation of new lines of business and/or new products or
services could have a material adverse effect on our business and, in turn, our financial condition and results of
operations.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions through alternative
methods that historically have involved banks. For example, consumers can now maintain funds that would
have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable
prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly
without the assistance of banks. The process of eliminating banks as intermediaries, known as
“disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the
related income generated from those deposits. The loss of these revenue streams and the lower cost of
deposits as a source of funds could have a material adverse effect on our financial condition and results of
operations.
26
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.
Future sales of our stock by our shareholders or the perception that those sales could occur may cause our
stock price to decline.
Although our common stock is listed for trading in The NASDAQ Global Select Market under the symbol FBNC,
the trading volume in our common stock is lower than that of other larger financial services companies. A public
trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in
the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on
the individual decisions of investors and general economic and market conditions over which we have no
control. Given the relatively low trading volume of our common stock, significant sales of our common stock in
the public market, or the perception that those sales may occur, could cause the trading price of our common
stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.
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
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,
cyber-attacks 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
27
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 and through mobile banking. The secure
transmission of confidential information over the Internet is a critical element of online and mobile 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’s 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
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.
28
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 March 31, 2016, and therefore we will bear the full risk of losses for assets currently under that
agreement subsequent to that date.
On January 21, 2011, we acquired The Bank of Asheville 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 The
Bank of Asheville expires on March 31, 2016. 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, 2015, the carrying value of the assets covered by The Bank of Asheville non-single family loss-
share agreement was approximately $18 million in loans, of which $3 million were on nonaccrual status because
of collection problems, and $0.3 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 April 1,
2016, we will incur 100% of the loss related to further deterioration of The Bank of Asheville non-single family
assets.
Our ability to receive benefits under FDIC loss share agreements is subject to compliance with certain
requirements, oversight and interpretation, and contractual term limitations.
We receive benefits under loss share agreements with the FDIC in connection with the FDIC-assisted acquisitions
of Cooperative Bank in June 2009 and The Bank of Asheville in January 2011. Under these loss share
agreements, the FDIC agreed to cover 80% of most loan and foreclosed real estate losses. We are subject to
certain obligations under these agreements that prescribe and specify how to manage, service, report, and
request reimbursement for losses incurred on covered assets. Our obligations under the loss share agreements
are extensive, and failure to comply with any obligations could result in a specific asset, or group of assets, losing
loss share coverage. Requests for reimbursement are subject to FDIC review and may be delayed or disallowed
if we are not in compliance with our obligations. Losses projected to occur during the loss share term may not
be realized until after the expiration of the applicable agreement; consequently, those losses may have a
material adverse impact on our results of operations. In addition, we are subject to FDIC audits to ensure
compliance with the loss share agreements. The loss share agreements are subject to interpretation by us and
the FDIC; therefore, disagreements may arise regarding the coverage of losses, expenses, and contingencies.
29
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
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 88 bank branches. The
Company owns all of its bank branch premises except 10 branch offices for which the land and buildings are
leased and eight branch offices for which the land is leased but the building is owned. The Company also leases
two 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. 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, 2015.
Item 4. Mine Safety Disclosure
Not applicable.
30
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 2015. For the foreseeable
future, it is our current intention to continue to pay regular cash dividends 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, 2015, there were
approximately 2,300 shareholders of record and another 3,100 shareholders whose stock is held in “street
name.”
There were no sales of unregistered securities during the year ended December 31, 2015.
Additional Information Regarding the Registrant’s Equity Compensation Plans
At December 31, 2015, the Company had three equity-based compensation plans. The Company’s 2014 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, 2015 regarding shares of the Company’s stock that
may be issued pursuant to the Company’s equity based compensation plans. At December 31, 2015, the
Company had no warrants or stock appreciation rights outstanding under any compensation plans.
(a)
(b)
(c)
As of December 31, 2015
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))
117,408
$ 18.12
─
117,408
─
$ 18.12
919,659
─
919,659
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 2014 Equity Plan, which is currently in effect; (B) the Company’s 2007 Equity
Plan; and (C) the Company’s 2004 Stock Option Plan, each of which was approved by our shareholders.
31
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the
five-year period commencing December 31, 2010 and ending December 31, 2015, 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, 2010 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, 2015
Total Return Performance
First Bancorp
Russell 2000
SNL Bank $1B-$5B
200
180
160
140
120
e
u
l
a
V
x
e
d
n
I
100
80
60
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
First Bancorp
Russell 2000
SNL Index-Banks between $1
2010
$ 100.00
100.00
billion and $5 billion
100.00
2011
74.98
95.82
91.20
2012
88.77
111.49
2013
117.63
154.78
2014
133.07
162.35
2015
137.48
155.18
112.45
163.52
170.98
191.39
Total Return Index Values (1)
December 31,
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, 2010, reinvestment of dividends, and changes in market values. Total
return index numerical values used in this example are for illustrative purposes only.
32
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, 2015.
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,
2015 to October 31,
2015)
Month #2 (November 1,
2015 to November
30, 2015)
Month #3 (December 1,
2015 to December
31, 2015)
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, 2015.
Item 6. Selected Consolidated Financial Data
Table 1 on page 75 of this report sets forth the selected consolidated financial data for the Company.
33
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 94 of this report and the
supplemental financial data contained in Tables 1 through 22 included with this discussion and analysis.
Overview - 2015 Compared to 2014
We reported net income per diluted common share of $1.30 in 2015, a 9.2% increase compared to 2014. The
increased earnings were primarily due to lower provisions for loan losses. Total assets increased by 4.5% year
over year.
Financial Highlights
($ in thousands except per share data)
Earnings
Net interest income
Provision for loan losses - non-covered
Provision (reversal) for loan losses - covered
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Net income per common share
Basic
Diluted
Balances At Year End
Assets
Loans
Deposits
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
n/m – not meaningful
2015
2014
Change
$ 119,747
2,008
(2,788)
18,764
98,131
41,160
14,126
27,034
(603)
$ 26,431
131,609
7,087
3,108
14,368
97,251
38,531
13,535
24,996
(868)
24,128
$ 1.34
1.30
1.22
1.19
$ 3,362,065
2,518,926
2,811,285
3,218,383
2,396,174
2,695,906
-9.0%
-71.7%
n/m
30.6%
0.9%
6.8%
4.4%
8.2%
9.5%
9.8%
9.2%
4.5%
5.1%
4.3%
0.82%
8.04%
4.13%
0.75%
7.73%
4.58%
The following is a more detailed discussion of our results for 2015 compared to 2014:
For the year ended December 31, 2015, we reported net income available to common shareholders of $26.4
million, or $1.30 per diluted common share, an increase of 9.5% compared to the $24.1 million, or $1.19 per
diluted common share, for the year ended December 31, 2014. The higher earnings were primarily the result of
lower provisions for loan losses.
Net interest income for the year ended December 31, 2015 amounted to $119.7 million, a 9.0% decrease from
the $131.6 million recorded in 2014. The lower net interest income in 2015 was primarily due to a decrease in
the amount of discount accretion recorded on loans purchased in failed bank acquisitions. For the full year of
2015, loan discount accretion amounted to $4.8 million compared to $16.0 million for 2014. The lower amount
34
of accretion is due to the continued winding down of the unaccreted discount amount that resulted from failed-
bank acquisitions in 2009 and 2011. As discussed below, the impact of the changes in discount accretion on
pretax income is generally 20% of the gross amount of the change. Also, see the section entitled “Net Interest
Income” for additional information.
Our net interest margin (tax-equivalent net interest income divided by average earning assets) was 4.13% for
2015 compared to 4.58% for 2014. The lower margin in 2015 compared to 2014 was primarily due to lower
amounts of discount accretion on loans purchased in failed-bank acquisitions. Partially offsetting the effects of
lower discount accretion was a decline in our cost of funds, which declined from 0.29% in 2014 to 0.24% in 2015.
We recorded negative total provisions for loan losses (reduction of the allowance for loan losses) on our covered
and non-covered loans of $0.8 million in 2015 compared to provision for loan losses of $10.2 million for 2014 –
see discussion of the term “covered” below. The provision for loan losses on non-covered loans amounted to
$2.0 million in 2015 compared to $7.1 million for 2014. The lower provision recorded in 2015 was primarily a
result of continued favorable credit quality trends and generally improving economic trends. For the year ended
December 31, 2015, we recorded a negative provision for loan losses on covered loans of $2.8 million compared
to a $3.1 million provision for loan losses in 2014. The negative provision in 2015 primarily resulted from lower
levels of covered nonperforming loans, declining levels of total covered loans, and net loan recoveries
(recoveries, net of charge-offs) of $2.3 million that were realized during the year ended December 31, 2015.
Our non-covered nonperforming assets declined 19.0% during 2015, amounting to $77.2 million at December
31, 2015 (2.37% of total non-covered assets) compared to $95.3 million at December 31, 2014 (3.09% of total
non-covered assets). The decline in non-covered nonperforming assets is primarily due to on-going resolution of
nonperforming assets and improving credit quality.
Total covered nonperforming assets also declined in 2015, amounting to $12.1 million at December 31, 2015
compared to $18.7 million at December 31, 2014. We continue to have success resolving our covered loans, and
property sales along the North Carolina coast remain strong, which is where most of the Company’s covered
assets are located.
For the year ended December 31, 2015, noninterest income amounted to $18.8 million compared to $14.4
million for the year ended December 31, 2014. The increase in 2015 was primarily the result of lower FDIC
indemnification asset expense, which is recorded as a reduction to noninterest income. FDIC indemnification
asset expense amounted to $8.6 million in 2015, a $4.2 million decrease from the $12.8 million recorded in
2014, with the lower expense being due to a lower amount of write-offs of the FDIC indemnification asset,
which is associated with the continued winding down of our loss share assets.
Noninterest expenses for the year ended December 31, 2015 amounted to $98.1 million, which was relatively
unchanged from the $97.3 million recorded in 2014.
Total assets at December 31, 2015 amounted to $3.4 billion, a 4.5% increase from a year earlier. Total loans at
December 31, 2015 amounted to $2.5 billion, a 5.1% increase from a year earlier, and total deposits amounted
to $2.8 billion at December 31, 2015, a 4.3% increase from a year earlier.
Non-covered loans amounted to $2.42 billion at December 31, 2015, an increase of $147.7 million, or 6.5% from
December 31, 2014, as a result of ongoing internal initiatives to drive loan growth. Loans covered by FDIC loss
share agreements declined 19.6% in 2015 as those loans continued to pay down.
The increase in total deposits at December 31, 2015 compared to December 31, 2014 was primarily due to
increases in checking, money market and savings accounts, which increased in total by $236.5 million, or 12.6%,
35
during 2015. Those increases were partially offset by decreases in time deposits, which declined a total of
$121.1 million, or 14.7%, during 2015. Time deposits are generally one of our most expensive funding sources,
and thus the shift from this category has reduced our overall cost of funds.
On June 25, 2015, we redeemed $32 million (32,000 shares) of the outstanding Non-Cumulative Perpetual
Preferred Stock, Series B (“SBLF Stock”) that had been issued to the United States Secretary of the Treasury in
September 2011 related to our participation in the Small Business Lending Fund. On October 16, 2015, the
remaining $31.5 million of SBLF Stock was redeemed, which ended our participation in the Small Business
Lending Fund.
We note that our results of operation discussed above 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. 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.
36
Overview - 2014 Compared to 2013
We reported net income per diluted common share of $1.19 in 2014, a 21.4% increase compared to 2013. The
increased earnings were primarily due to lower provisions for loan losses. Total assets increased by 1% year
over year.
Financial Highlights
($ in thousands except per share data)
Earnings
Net interest income
Provision for loan losses - non-covered
Provision for loan losses - covered
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Net income per common share
Basic
Diluted
Balances At Year End
Assets
Loans
Deposits
2014
2013
Change
$ 131,609
7,087
3,108
14,368
97,251
38,531
13,535
24,996
(868)
$ 24,128
136,526
18,266
12,350
23,489
96,619
32,780
12,081
20,699
(895)
19,804
-3.6%
-61.2%
-74.8%
-38.8%
0.7%
17.5%
12.0%
20.8%
21.8%
$ 1.22
1.19
1.01
0.98
20.8%
21.4%
$ 3,218,383
2,396,174
2,695,906
3,185,070
2,463,194
2,751,019
1.0%
-2.7%
-2.0%
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
0.75%
7.73%
4.58%
0.62%
6.78%
4.92%
The following is a more detailed discussion of our results for 2014 compared to 2013:
For the year ended December 31, 2014, we reported net income available to common shareholders of $24.1
million, or $1.19 per diluted common share, an increase of 21.8% compared to the $19.8 million, or $0.98 per
diluted common share, for the year ended December 31, 2013. The higher earnings were primarily the result of
lower provisions for loan losses.
Net interest income for the year ended December 31, 2014 amounted to $131.6 million, a 3.6% decrease from
the $136.5 million recorded in 2013. The lower net interest income in 2014 was primarily due to a decrease in
the amount of discount accretion on loans purchased in failed bank acquisitions. Loan discount accretion
amounted to $16.0 million in 2014 compared to $20.2 million in 2013, a decrease of $4.2 million. The impact of
the changes in discount accretion on pretax income is generally 20% of the gross amount of the change.
Our net interest margin (tax-equivalent net interest income divided by average earning assets) was 4.58% for
2014 compared to 4.92% for 2013. The lower margin realized in 2014 was primarily due to lower amounts of
discount accretion on loans purchased in failed-bank acquisitions and lower average asset yields. Partially
offsetting the effects of lower discount accretion and lower average asset yields was a decline in our cost of
funds, which declined from 0.39% in 2013 to 0.29% in 2014.
37
We recorded total provisions for loan losses on our covered and non-covered loans of $10.2 million in 2014
compared to $30.6 million for 2013. The provision for loan losses on non-covered loans amounted to $7.1
million in 2014 compared to $18.3 million for 2013. The lower provision recorded in 2014 was primarily a result
of stable asset quality trends and a decline in non-covered loan balances (excluding the transfer of $39.7 million
in loans from covered status to non-covered status on July 1, 2014 – see discussion below). For the year ended
December 31, 2014, the provision for loan losses on covered loans amounted to $3.1 million compared to $12.4
million for 2013. The decrease in 2014 was primarily due to lower levels of covered nonperforming loans during
the period and stabilization in the underlying collateral values of nonperforming loans.
Our non-covered nonperforming assets amounted to $95.3 million at December 31, 2014 (3.09% of total non-
covered assets) compared to $82.0 million at December 31, 2013 (2.78% of total non-covered assets). The
increase in 2014 was due to the Company transferring $14.8 million in nonperforming assets from covered
status to non-covered status on July 1, 2014 upon the scheduled expiration of a loss sharing agreement with the
FDIC associated with those assets – see discussion below.
Total covered nonperforming assets have declined in the past year, amounting to $18.7 million at December 31,
2014 compared to $70.6 million at December 31, 2013. During 2014 we resolved a significant amount of
covered loans and experienced strong property sales along the North Carolina coast, which is where most of our
covered assets are located. Also, as discussed in the preceding paragraph, on July 1, 2014 the Company
transferred $14.8 million in nonperforming assets from covered status to non-covered status upon the
expiration of a loss sharing agreement.
For the year ended December 31, 2014, noninterest income amounted to $14.4 million compared to $23.5
million for 2013. The decrease in 2014 was primarily the result of higher FDIC indemnification asset expense,
which is recorded as a reduction to noninterest income. FDIC indemnification expense amounted to $12.8
million in 2014, an increase from $6.8 million in 2013, with the higher expense being primarily the result of
write-offs of the FDIC indemnification asset due to lower expected FDIC reimbursements resulting from lower
expectations of loss claims. Also contributing to lower noninterest income in 2014 were higher levels of
foreclosed property losses compared to 2013.
Noninterest expenses for the year ended December 31, 2014 amounted to $97.3 million, which was relatively
unchanged from the $96.6 million recorded in 2013.
Total assets at December 31, 2014 amounted to $3.2 billion, a 1.0% increase from a year earlier. Total loans at
December 31, 2014 amounted to $2.4 billion, a 2.7% decrease from a year earlier, and total deposits amounted
to $2.7 billion at December 31, 2014, a 2.0% decrease from a year earlier.
Investment securities totaled $342.7 million at December 31, 2014 compared to $227.0 million at December 31,
2013. In the fourth quarter of 2014, the Company used a portion of its excess cash balances to purchase
approximately $125 million in investment securities in order to earn higher yields.
Non-covered loans amounted to $2.3 billion at December 31, 2014, an increase of $15.7 million from December
31, 2013. The increase was due to the reclassification of $39.7 million in loans from covered status to non-
covered status in connection with the July 1, 2014 expiration of a loss sharing agreement – see discussion below.
Loan growth was impacted by a relatively slow economic recovery in many of our market areas, as well as
temporary pressures from new internal loan processes designed to enhance loan quality. Covered loans
declined by $82.7 million in 2014 due to the continued resolution of this portfolio and due to the reclassification
discussed above.
38
The lower amount of deposits at December 31, 2014 compared to December 31, 2013 was primarily due to
declines in time deposits, with increases in checking accounts offsetting a large portion of the decline.
Other noteworthy events occurring in 2014 were:
• As noted above, a loss-sharing agreement with the FDIC covering non-single family loans and foreclosed
properties that were assumed in a failed bank acquisition in 2009 expired on July 1, 2014. We bear all
future losses on these assets; however, at present, management does not expect such losses will be
materially in excess of related loan loss allowances. The following presents information related to these
assets as of July 1, 2014, which were transferred to the “non-covered” categories on that date.
o Loans outstanding: $39.7 million
o Nonaccrual loans: $9.7 million
o Troubled debt restructurings - accruing: $2.1 million
o Allowance for loan losses: $1.7 million
o Foreclosed properties: $3.0 million
We continue to have three loss-sharing agreements with the FDIC in place. The next agreement that
expires does so on April 1, 2016.
•
In December 2014, we completed the planned closure and consolidation of nine of our branches. All
branches were consolidated with other branches near the closing location. We recorded approximately
$1.0 million in expense related to the branch consolidations.
Outlook for 2016
The interest rate environment remains challenging. Historically, the interest rates we charge loan customers are
correlated with long-term interest rates in the marketplace. While the Federal Reserve increased short-term
interest rates by 25 basis points in late 2015, long-term interest rates remain at historic lows. Additionally,
interest rates on loans continue to be impacted downward by intense competition, and we expect continued
declines in our loan discount accretion as our covered loan portfolios continue to wind down. Accordingly, we
expect our overall loan yield to continue to decline. 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 a
continued compression of our net interest margin is likely.
With three consecutive years of significantly improved trends of nonperforming assets and lower loan charge-
offs compared to the recession years, we recorded low levels of provisions for loan losses in 2015, which
brought our overall allowance for loan loss level down to a more normalized level following the elevated
amounts we maintained during and immediately following the recession. In 2016, we expect it is likely that we
will record a higher provision for loan losses than we did in 2015, as we provide for on-going loan charge-offs
and expected new loan growth.
Our local economies are generally improving, and we experienced solid loan and deposit growth in 2015.
Additionally, over the past twelve months we have hired a number of experienced bankers who have brought us
business, and we expect they will continue to do so. Accordingly, we expect to experience continued loan and
deposit growth in 2016.
In late 2015 and early 2016, we began implementing plans to grow in larger and higher growth markets in North
Carolina. It is likely the expected benefit to revenue and earnings will lag the initial and ongoing expense outlay
39
as we develop business. However, we believe we will achieve growth in these new markets that will benefit our
company in a long-term horizon.
Consistent with the plan noted above and as previously discussed, in March 2016, we announced an agreement
to exchange bank branches with another community bank that will result in our assumption of six bank branches
in the Winston-Salem and Charlotte-metro markets of North Carolina, in return for our seven branches in
southwestern Virginia.
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 two components. The first component involves the
estimation of losses on individually evaluated “impaired loans”. A loan is considered to be impaired when,
based on current information and events, it is probable we will be unable to collect all amounts due according to
the contractual terms of the loan agreement. A loan is specifically evaluated for an appropriate valuation
allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality,
accruing status, troubled debt restructured status, and type of collateral) and the loan is determined to be
impaired. The estimated valuation allowance is the difference, if any, between the loan balance outstanding
and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to
receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent
loan, the fair value of the collateral.
The second component of the allowance model is an estimate of losses for all loans not considered to be
impaired loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk
grade and estimated loss percentages are assigned to each loan pool based on historical losses. The historical
loss percentage is then adjusted for any environmental factors used to reflect changes in the collectability of the
portfolio not captured by historical data.
The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for
general reserve loans. This becomes our “allocated allowance.” The allocated allowance is compared to the
actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded
allowance to absorb losses inherent in the portfolio is recorded as a provision for loan losses. The provision for
loan losses is a direct charge to earnings in the period recorded. Any remaining difference between the
allocated allowance and the actual allowance for loan losses recorded on our books is our “unallocated
allowance.”
40
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
41
loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis
would involve the significant use of estimates and assumptions.
In our 2015 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 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. We did not complete any acquisitions in
2014 or 2015. See Note 2 to the consolidated financial statements for additional information regarding these
acquisitions.
As previously discussed, on January 1, 2016, we acquired an insurance agency in Sanford, North Carolina, and on
March 4, 2016, we announced we had agreed to exchange our seven bank branches located in Virginia to
another community bank in return for six of their branches.
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
42
transaction, we entered into two loss share agreements with the FDIC, which provided First Bank significant loss
protection from losses experienced on the loans and foreclosed real estate. Under the Cooperative Bank loss
share agreements, the FDIC covers 80% of covered loan and foreclosed real estate losses up to $303 million, and
95% of losses in excess of that amount. Under The Bank of Asheville loss share agreements, the FDIC covers
80% of all covered loan and foreclosed real estate losses. For both transactions, the loss share reimbursements
are applicable for ten years for single family home loans and five years for all other loans. As previously
discussed, one of the loss share agreements related to the Cooperative Bank acquisition expired on July 1, 2014.
We recorded a FDIC indemnification asset related to the two transactions to account for payments that we
expect to receive from the FDIC related to the loss share agreements. The carrying value of this receivable at
each period end is the sum of: 1) actual claims that have been incurred and are in the process of submission to
the FDIC for reimbursement, but have not yet been received and 2) our estimated amount of claimable loan and
other real estate losses covered by the agreements multiplied by the FDIC reimbursement percentage.
At December 31, 2015 and 2014, the FDIC indemnification asset was comprised of the following components:
($ in thousands)
Receivable (payable) related to claims incurred (recoveries), not yet received (paid), net
Receivable related to estimated future claims on loans
Receivable related to estimated future claims on foreclosed real estate
FDIC indemnification asset
2015
$ (633)
8,675
397
$ 8,439
2014
6,899
14,933
737
22,569
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 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. In 2014
and 2013, we recorded total provisions for loan losses on covered loans amounting to $3.1 million and $12.4
million, respectively, which resulted in upward adjustments to the FDIC indemnification asset of $1.4 million and
$9.6 million, respectively. We also record some provisions for loan losses without corresponding increases to
the indemnification asset because we believe certain loan losses will occur after the expiration of the loss share
agreements. In 2014 and 2013, we recorded provisions for loan losses on covered loans without a
corresponding increase to the indemnification asset of $1.4 million and $0.3 million, respectively. In 2015, we
recorded a negative provision for loan losses on covered loans amounting to $2.8 million, which resulted in
downward adjustments to the FDIC indemnification asset of $2.2 million. The negative provision in 2015 was
primarily the result of loan recoveries that exceeded charge-offs by $2.3 million.
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 review the fair value of
the property through updated appraisals or independent market pricing, and if the appraisal or market pricing
indicates a fair value lower than our carrying value, we must write the property down. We also sell foreclosed
43
properties that frequently result in losses. Each of these situations generally results in the Company recording
losses on foreclosed properties with a corresponding increase to the FDIC indemnification asset by recording
noninterest income in proportion to the reimbursement percentage. If we sell a foreclosed property that results
in a gain, then we generally record a corresponding decrease to the FDIC indemnification asset to reflect the fact
that we must reimburse the FDIC 80% of any gains that relate to prior claims. In 2015, we recorded net gains on
covered foreclosed properties amounting to $1.0 million, which resulted in a downward adjustment to the FDIC
indemnification asset of $0.4 million. In 2014, we recorded net losses and write-downs on covered foreclosed
properties amounting to $1.9 million, which resulted in an upward adjustment to the FDIC indemnification asset
of $1.5 million. In 2013, we recorded net 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.
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 2015, 2014, and 2013, we incurred $1.2
million, $3.1 million, and $6.5 million, in gross collection expenses related to covered assets, respectively, and
reduced that amount by $1.2 million, $3.9 million, and $5.4 million in FDIC reimbursements, respectively.
4) 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 2015, 2014, and 2013, we received $6.7 million, $17.7
million, and $49.6 million in FDIC reimbursements, respectively.
5) 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 (as 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 become less than the original estimate, our expected reimbursement from the FDIC declines as well.
Accordingly, we generally reduce the FDIC indemnification asset in correlation to the accretion of the loan
discount. In 2015, 2014, and 2013, we recorded discount accretion of $4.8 million, $16.0 million, and $20.2
million, respectively, which resulted in reductions to the FDIC indemnification asset and indemnification expense
of $5.6 million, $15.3 million, and $16.2 million, respectively.
In summary, circumstances that result in adjustments to the FDIC indemnification asset are recorded within the
income statement line items noted without consideration of the FDIC loss share agreements. Because favorable
changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets
generally result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those
expectations. The net increase or decrease in the indemnification asset is reflected within noninterest income.
The adjustments can result in volatility within individual income statement line items. Because of the FDIC loss
share agreements and the associated indemnification asset, amounts recorded as provisions for loan losses,
discount accretion, and losses from foreclosed properties generally only impact pretax income by 20% of those
amounts, due to the corresponding adjustments made to the indemnification asset.
44
The following presents a rollforward of the FDIC indemnification asset since the date of the Cooperative Bank
acquisition on June 19, 2009 and includes additions related to The Bank of Asheville acquisition in 2011.
($ 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
Increase related to unfavorable change in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Other
Balance at December 31, 2014
Increase (decrease) related to unfavorable (favorable) changes in loss estimates
Increase related to reimbursable expenses
Cash received
Accretion of loan discount
Decrease related to settlement of disputed claims
Other
Balance at December 31, 2015
$ 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
2,923
3,925
(17,724)
(15,281)
104
22,569
(3,031)
1,232
(6,673)
(5,584)
(406)
332
$ 8,439
45
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, 2015
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
Foreclosed Properties
Net carrying value
Indemnification asset recorded
Cooperative
Single Family
Loss Share
Loans
6/30/2019
Bank of
Asheville
Single Family
Loss Share
Loans
3/31/2021
Bank of
Asheville
Non-Single
Family Loss
Share Loans
3/31/2016
$ 5,265
5,104
570
4,534
251
511
85,824
85,685
11,528
74,157
1,092
6,815
780
610
389
221
6
232
6,458
6,379
1,099
5,280
55
804
91,089
90,789
12,098
78,691
1,343
7,326
7,238
6,989
1,488
5,501
61
1,036
6,295
4,276
1,215
3,061
171
245
15,860
15,847
459
15,388
224
77
22,155
20,123
1,674
18,449
Total
12,340
9,990
2,174
7,816
428
988
108,142
107,911
13,086
94,825
1,371
7,696
120,482
117,901
15,260
102,641
1,799
395
322
8,684 **
512
365
1,969
2,848
̶
̶
812
680
294
32
806
397
1,970
4,751
2,056
5,584
For the Year Ended December 31, 2015
Loan discount accretion recognized
Indemnification asset expense associated with the loan discount
accretion recognized
* Reflects partial charge-offs
** A present value adjustment of $9 reduces the carrying value of this asset to $8,675
Our loss share agreement related to Cooperative Bank’s non-single family assets expired on June 30, 2014. On
July 1, 2014, the remaining balances associated with the Cooperative non-single family loans and foreclosed
properties were transferred from the covered portfolio to the non-covered portfolio. We bear all future losses
on this portfolio of loans and foreclosed properties. Immediately prior to the transfer, this portfolio of loans had
a carrying value of $39.7 million and the portfolio of foreclosed properties had a carrying value of $3.0 million,
and both portfolios were classified as covered. Of the $39.7 million in loans that lost loss share protection,
approximately $9.7 million of these loans were on nonaccrual status and $2.1 million of these loans were
classified as accruing troubled debt restructurings as of July 1, 2014. Additionally, approximately $1.7 million in
allowance for loan losses that related to this portfolio of loans was transferred to the allowance for loan losses
for non-covered loans on July 1, 2014. As of July 1, 2014, there was no remaining loan discount or
indemnification asset related to the Cooperative non-single family loss share loans or foreclosed properties.
As noted in the table above, our loss share agreement related to Bank of Asheville’s non-single family assets
expires in March 2016. We continue to make progress in winding down this portfolio, and we do not currently
expect its expiration will have a material impact on our Company.
46
Loan discount accretion and corresponding indemnification asset expense continue to be recorded on the three
portfolios covered by loss share agreements. Because of the continued decline in the amount of remaining
unaccreted discount, the amount of loan discount accretion and corresponding indemnification asset expense is
expected to continue to decline in future periods.
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 $119.7 million in 2015, $131.6 million in 2014, and $136.5
million in 2013. 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 $121.4 million in 2015, $133.1 million in 2014, and
$138.0 million in 2013. Management believes that analysis of net interest income on a tax-equivalent basis is
useful and appropriate because it allows a comparison of net interest amounts in different periods without
taking into account the different mix of taxable versus non-taxable investments that may have existed during
those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest
income.
($ in thousands)
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
2015
$ 119,747
1,634
$ 121,381
Year ended December 31,
2014
131,609
1,502
133,111
2013
136,526
1,511
138,037
Table 2 analyzes net interest income on a tax-equivalent basis. Our net interest income on a tax-equivalent
basis decreased by 8.8% in 2015 and decreased by 3.6% in 2014. 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 decreases in net interest income in 2015 and 2014 were primarily due to decreases in our net interest
margin during 2015 and 2014. “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 decreased from 4.92% in 2013 to 4.58% in 2014
to 4.13% in 2015.
Lower asset yields have been the primary factor causing the decline in the net interest margin. From 2013 to
2015, the yield we earned on our interest-earning assets declined from 5.31% in 2013 to 4.86% in 2014 to 4.37%
in 2015. The biggest factor causing our lower net interest margin in 2015 compared to 2014 was lower discount
accretion on loans purchased in failed bank acquisitions (see discussion below). Additionally, for the past
several years, the interest rate environment has remained at low levels with maturing assets originated in prior
periods generally repricing at progressively lower interest rates at renewal/maturity. Also impacting the decline
in 2014 was our decision, in anticipation of higher loan growth and expectation of higher interest rates, to
maintain a higher mix of our earnings assets in liquid cash accounts that earned relatively little interest. Late in
47
the fourth quarter of 2014, in order to improve yields and in expectation that interest rate increases were
further off than originally projected, we elected to invest a portion of our excess cash. Accordingly we
purchased approximately $125 million of investment securities, which helped lessen the impact of lower loan
yields in 2015.
The declines in asset yields were partially offset by lower liability costs. 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 0.43% in 2013 to 0.32%
in 2014 to 0.26% in 2015. Also, the funding mix of 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 $1.7 billion in 2013 to $2.0 billion in 2015, an increase of 15%, while the average amount of our
higher cost funding, comprised of time deposits and borrowings, decreased from $1.1 billion to $0.9 billion over
that same period, a decline of 21%.
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 $4.8
million in 2015, $15.9 million in 2014, and $19.8 million in 2013, in net accretion of purchase accounting
premiums/discounts that increased net interest income.
($ in thousands)
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Year Ended
December 31,
2013
Interest income – reduced by premium amortization on loans
Interest income – increased by accretion of loan discount
Interest expense – reduced by premium amortization of deposits
Impact on net interest income
$ −
4,751
−
$ 4,751
(98)
16,009
7
15,918
(386)
20,200
29
19,843
The biggest component of the purchase accounting adjustments in each year was loan discount accretion, which
amounted to $4.8 million in 2015, $16.0 million in 2014, and $20.2 million in 2013. In 2015 and 2014, lower
amounts of remaining unaccreted loan discount resulted in lower amounts of loan discount accretion –
unaccreted loan discount amounted to $15 million, $21 million, and $40 million at December 31, 2015, 2014 and
2013, respectively. We expect loan discount accretion to continue to decline as a result of the continued decline
in remaining unaccreted discount.
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 2014 and 2015. For both years,
changes in interest rates was the primary factor affecting net interest income. Table 3 indicates that in 2015,
changes in interest rates reduced interest income by $15.3 million, while interest expense was only reduced by
$0.7 million due to rates. Thus, the disparate impact of lower interest rates was the primary reason that net
interest income decreased by $11.7 million during the year. Similarly in 2014, the impact of the lower rates
reduced interest income by $8.7 million, while interest expense was only reduced by $2.7 million due to rates.
Thus, lower interest rates were the primary reason that net interest income decreased by $4.9 million during the
year.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
48
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.
For 2015, we recorded total negative provisions for loan losses (reduction of allowance for loan losses) of $0.8
million. For 2014 and 2013, our total provisions for loan losses were $10.2 million and $30.6 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 $2.0 million, $7.1 million, and $18.3 million in provisions for loan losses related to non-covered
loans for the years ended December 31, 2015, 2014, and 2013, respectively. The lower provision in 2015
compared to 2014 was primarily the result of stable asset quality trends. Non-covered loan growth for 2015 was
$148 million compared to a decline of $24 million in 2014, which resulted in a larger incremental provision for
the loan losses attributable to loan growth. However, offsetting this larger incremental provision were favorable
trends in our asset quality. Our non-covered classified and nonaccrual loans decreased from $125.4 million at
December 31, 2014 to $101.9 million at December 31, 2015. Additionally, our allowance for loan loss model,
which dictates the provisions for loan losses that we record, utilizes the net charge-offs experienced in the most
recent years as a significant component of estimating the current allowance for loan losses that is necessary.
Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on.
The final periods of high net charge-offs we experienced during the peak of the recession dropped out of the
analysis in 2015 and were replaced by the more modest levels of net charge-offs recently experienced. The
fourth quarter of 2015 marked our twelfth consecutive quarter of annualized net charge-offs related to non-
covered loans being less than 1.00%, whereas at the peak of the recession, that ratio was frequently over 1.00%.
Accordingly, the relatively low provision recorded in 2015 resulted in our non-covered allowance for loan loss
declining to a more normalized level following the elevated amounts we maintained during and immediately
following the recession. In 2016, it is likely that we will record a higher amount of provision for loan losses than
we did in 2015, as we provide for on-going loan charge-offs and expected new loan growth.
The same general factors discussed above that resulted in a lower provision for loan losses in 2015 also resulted
in the provision for loan losses being lower in 2014 compared to 2013.
As it relates to covered loans, we recorded a negative provision for loan losses (reduction of allowance for loan
losses) of $2.8 million in 2015. The negative provision resulted from lower levels of covered nonperforming
loans, declining levels of total covered loans, and several large recoveries received that resulted in having net
loan recoveries (recoveries, net of charge-offs) of $2.3 million for 2015.
We recorded provisions for loan losses on covered loans of $3.1 million and $12.4 million during 2014 and 2013,
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 nonaccrual loans for which we
received updated appraisals during the year that reflected lower collateral valuations. The decline in the
provision for loan losses on covered loans from 2013 to 2014 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 as a result of claimable losses associated with these loans.
Total net charge-offs (covered and non-covered) for the years ended December 31, 2015, 2014, and 2013, were
$11.3 million, $18.1 million, and $28.5 million, respectively.
49
Net-charge offs of non-covered loans were $13.6 million, $14.7 million, and $15.6 million for 2015, 2014, and
2013, respectively. The ratio of net charge-offs to average non-covered loans was 0.58%, 0.65%, and 0.72% for
2015, 2014, and 2013, respectively. The declining amount of non-covered net-charge offs in recent years is
reflective of improving economic conditions and lower levels of our highest-risk loans.
Net charge-offs (recoveries) of covered loans were ($2.3 million), $3.3 million and $12.9 million in 2015, 2014,
and 2013, respectively. During 2015, we realized covered recoveries of $3.6 million, which more than offset our
gross charge-offs of $1.3 million. In 2014 we realized a recovery of $1.9 million related to a covered loan that
was the subject of a significant charge-off in 2013, which reduced net charge-offs for 2014. The lower levels of
net charge-offs is also reflective of lower amounts of nonperforming covered loans.
As seen in Tables 14 and 14a, in 2015, net charge-offs were highest in the loans classified as “real estate –
mortgage – residential (1-4 family) first mortgages.” Charge-offs of residential first mortgage loans reflect
continued challenging economic conditions in some of our more rural market areas. In 2014 and 2013, net
charge-offs were highest 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.
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 $18.8 million in 2015, $14.4 million in 2014, and $23.5 million in 2013.
As shown in Table 4, core noninterest income excludes gains from acquisitions, foreclosed property write-downs
and losses, indemnification asset income (expense), securities gains or losses, and other miscellaneous gains and
losses. Core noninterest income amounted to $29.3 million in 2015, a 3.8% decrease from the $30.5 million
recorded in 2014. The 2014 core noninterest income of $30.5 million was 8.0% higher than the $28.2 million
recorded in 2013.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
Service charges on deposit accounts amounted to $11.6 million, $13.7 million, and $12.8 million in 2015, 2014
and 2013, respectively. After the elimination of free checking for most customers with low balances in late 2013
which resulted in a strong increase in service charges in the first half of 2014, monthly fees earned on deposit
accounts gradually declined thereafter as a result of more customers meeting the requirements to have the
monthly service charge waived. Fewer instances of fees earned from customers overdrawing their accounts also
impacted this line item in 2015.
Other service charges, commissions and fees amounted to $10.9 million in 2015, an 8.9% increase from the
$10.0 million earned in 2014. The 2014 amount of $10.0 million was 7.5% higher than the $9.3 million earned in
2013. 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
50
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. Interchange income
from credit cards has also increased due to growth in the number and usage of credit cards, which we believe is
a result of increased promotion of this product.
Fees from presold mortgages amounted to $2.5 million in 2015, $2.7 million in 2014, and $2.9 million in 2013.
Lower refinancing activity resulted in slight decreases in these fees in 2015 and 2014. Also, a portion of the
decline in 2015 was due to our decision to hold more loans for investment in 2015 compared to 2014 in order to
offset declines in our residential mortgage loan portfolio.
Commissions from sales of insurance and financial products amounted to $2.6 million in 2015, $2.7 million in
2014, and $2.1 million in 2013. This line item includes commissions we receive from three sources - 1) sales of
credit life insurance associated with new loans, 2) commissions from the sales of investment, annuity, and long-
term care insurance products, and 3) commissions from the sale of property and casualty insurance. The
following table presents the contribution of each of the three sources to the total amount recognized in this line
item:
($ 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
For the year ended December 31,
2015
2014
2013
$ 26
43
58
1,934
620
$ 2,580
2,028
662
2,733
1,353
721
2,132
As can be seen in the above table, sales of investments, annuities and long term care insurance declined slightly
in 2015 compared to 2014 resulting from lower commissions earned on sales of investments. The increase from
2013 to 2014 was the result of hiring more employees in our investment division in the years leading up to 2014.
Table 4 shows earnings from bank owned life insurance income were $1.7 million in 2015, $1.3 million in 2014,
and $1.1 million in 2013. In 2015, 2014, and 2013, we purchased $15.0 million, $10.0 million, and $15.0 million,
respectively, in bank-owned life insurance on certain officers of our company, which increased our income for
this line item.
Noninterest income not considered to be “core” resulted in net reductions to total noninterest income of $10.6
million in 2015, $16.1 million in 2014, and $4.7 million in 2013. The components of non-core noninterest
income are shown in Table 4 and the significant components thereof are discussed below.
We recorded net losses on non-covered foreclosed properties of $2.5 million in 2015 and $1.9 million in 2014
compared to net gains of $1.3 million in 2013. In 2015 and 2014, in order to dispose of certain of our foreclosed
properties that we had held for an extended period of time, it became necessary to accept sales offers that
resulted in losses. In 2013, we experienced miscellaneous gains from sales of properties following stabilization
in real estate market values and lower carrying values following significant write-downs recorded in 2012.
We recorded $1.0 million of net gains on covered foreclosed properties in 2015, $1.9 million of net losses on
covered foreclosed properties in 2014, and $0.4 million of net gains on covered foreclosed properties in 2013.
Gains and losses on covered foreclosed properties have generally been lower in recent years than in the years
immediately following our failed bank acquisitions, as we are holding significantly lower levels of covered
foreclosed properties and real estate prices have stabilized. As discussed earlier and illustrated in the table
51
below, when gains or losses are realized on covered foreclosed properties, there is generally a corresponding
entry to indemnification asset income (expense) amounting to 80% of the losses (gains) recorded.
Indemnification asset expense amounted to $8.6 million, $12.8 million, and $6.8 million, for the three years
ended December 31, 2015, respectively. Indemnification asset income (expense) is recorded to reflect
additional (decreased) amounts expected to be received from the FDIC during the period related to covered
assets. The three primary items that result in recording indemnification asset income (expense) are 1) loan
discount accretion resulting from improved borrower repayment prospects, which generally results in
indemnification expense, 2) provisions (reversals) for loan losses on covered loans, which result in
indemnification income (expense) and 3) foreclosed property gains (losses) on covered assets, which result in
indemnification expense related to gains and indemnification income related to losses. The lower
indemnification asset expense in 2015 is primarily correlated with significantly lower loan discount accretion
income recorded in 2015. The higher indemnification asset expense in 2014 is primarily related to fewer loan
losses, which resulted in lower indemnification income to offset the other sources of indemnification expense.
The following table presents the sources of indemnification income (expense) for the periods noted.
($ in millions)
Indemnification asset expense associated with loan discount accretion income
Indemnification asset income (expense) associated with loan losses (recoveries), net
Indemnification asset income (expense) associated with foreclosed property losses (gains)
Other sources of indemnification asset income (expense)
Total indemnification asset income (expense)
For the year ended December 31,
2013
2014
2015
$ (5.6)
(2.3)
(0.4)
(0.3)
$ (8.6)
(15.3)
1.4
1.5
(0.4)
(12.8)
(16.2)
9.6
(0.3)
0.1
(6.8)
Securities gains (losses) were insignificant for 2015. We recorded $0.8 million and $0.5 million in securities gains
during 2014 and 2013, respectively, related to sales of $47.5 million and $12.9 million in available for sale
securities, respectively.
The line item “Other gains (losses)” was negatively impacted in 2015 by a $0.4 million write-off of a FDIC claim
associated with a dispute settlement (see Note 6 of the consolidated financial statements for additional
discussion), whereas in 2014, the net loss included losses on sales of vacated branch buildings. The amount for
2013 was insignificant.
Noninterest Expenses
Total noninterest expenses totaled $98.1 million, $97.3 million, and $96.6 million for 2015, 2014 and 2013,
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 $55.2 million in 2014 to $56.8 million in 2015, an increase of $1.6
million, or 3.0%. Within personnel expense, salaries expense increased $1.6 million, of which $0.9 million
related to higher amounts of incentive compensation expense earned by employees in 2015. Also, we recorded
$0.6 million in stock-based compensation expense in 2015 compared to $0.1 million in 2014, primarily related to
retention-based stock grants made in 2015. Employee benefits expense for 2015 remained unchanged from
2014 at $9.1 million.
In comparing 2014 to 2013, total personnel expense increased from $54.8 million in 2013 to $55.2 million in
2014, an increase of $0.4 million, or 0.7%. Within personnel expense, salaries expense increased $1.0 million,
which relates to higher amounts of incentive compensation as a result of higher earnings in 2014, as well as
lower amounts of salary expense deferred and recognized as a loan yield adjustment, as a result of fewer new
loan originations. The increase in salaries expense in 2014 was largely offset by a decrease in employee benefits
52
expense. Employee benefits expense decreased by $0.6 million, or 5.8%, in comparing 2014 to 2013, which is
primarily attributable to the pension income we recorded in 2014 related to investment income from our
pension plan’s assets. Pension income for the year ended December 31, 2014 was $1.1 million in comparison to
pension income of $0.6 million recorded in 2013.
Net occupancy expenses have remained relatively stable over the past three years, amounting to $7.4 million in
2015, $7.4 million in 2014, and $7.1 million in 2013.
Equipment related expenses were $3.7 million, $3.9 million, and $4.4 million, in 2015, 2014, and 2013,
respectively. During the fourth quarter of 2013, we outsourced certain data processing activities to a third-party
provider, which resulted in a reduction in depreciation expense and machine maintenance expense associated
with the computer equipment and software that is no longer being used for data processing.
FDIC insurance expense amounted to $2.4 million in 2015, $4.0 million in 2014, and $2.8 million in 2013. The
insurance premium rate charged by the FDIC is based on several variable factors that can result in fluctuations
from year to year.
Collection expenses related to non-covered assets have remained relatively unchanged over the past three
years, amounting to $2.2 million in 2015, $2.1 million in 2014, and $2.2 million in 2013.
Collection expenses on covered assets, net of FDIC reimbursements, amounted to a net reimbursement of $0.1
million in 2015, a net reimbursement of $0.9 million in 2014 and expense of $1.1 million in 2013. This expense
has generally declined in recent years due to the declining levels of covered nonperforming assets. Additionally,
in the fourth quarter of 2014, we determined that approximately $1.0 million in collection expenses incurred in
prior years associated with covered assets were eligible to be claimed for reimbursement with the FDIC. We
expect collection expenses on covered assets, net of FDIC reimbursements, to be minimal in 2016.
Telephone and data line expense amounted to $2.1 million in 2015 and $2.0 million in 2014, compared to $1.5
million in 2013. The higher levels in 2014 and 2015 compared to 2013 were due to costs associated with
upgrades in the quality of our data lines at many of our branches.
As discussed above, in December 2013 we began outsourcing our core data processing to a large, reputable
processor. We previously processed our data in-house, and expenses related to these activities were included in
various line items of our Consolidated Statements of Income. We recorded $1.7 million in data processing
expense in 2014 and $1.9 million in 2015 compared to none in 2013.
Legal and audit expense amounted to $1.7 million in 2015 and $2.0 million in 2014, compared to $1.2 million in
2013. The increase from 2013 to 2014 is primarily a result of our decision to outsource the internal audit
function in late 2013.
Outside consultant expense was $1.7 million in each of 2015 and 2014 compared to $2.5 million in 2013. An
efficiency project using outside consultants that began in 2012 wound down in 2014, which resulted in a decline
in this line item in 2014.
In 2014, we also recorded $1.0 million in expenses related to the consolidation and closure of nine of our
branches. The branches that were consolidated were generally smaller in size with relatively low staff counts.
We recorded $0.2 million and $0.5 million in severance expenses in 2015 and 2014, respectively. In 2013, we
recorded $1.9 million in severance expenses due primarily to the separation from service of our former chief
executive officer.
53
Income Taxes
Table 6 presents the components of income tax expense and the related effective tax rates. We recorded
income tax expense of $14.1 million in 2015, $13.5 million in 2014, and $12.1 million in 2013. Our effective tax
rates was 34.3% for 2015, 35.1% for 2014 and 36.9% for 2013. The progressively lower effective tax rate has
been due to higher amounts of tax-exempt income, primarily bank-owned life insurance income, and lower
statutory income tax rates in North Carolina. Effective January 1, 2014, North Carolina implemented decreases
to its state income tax rate for corporations from 6.9% in 2013 to 6.0% in 2014 to 5.0% in 2015. The North
Carolina state income tax rate further declines to 4% in 2016, and thus we expect our effective tax rate will
decline to approximately 34.0% in 2016. Our effective tax rate in 2013 was unfavorably impacted by the change
in the North Carolina state tax rates, as we recorded incremental tax expense of $0.5 million to reduce the value
of our deferred tax asset due to the lower future rates.
Stock-Based Compensation
We recorded stock-based compensation expense of $0.7 million, $0.3 million, and $0.2 million for the years
ended December 31, 2015, 2014, and 2013, respectively. The higher expense in 2015 was due to retention-
based restricted stock grants made to certain officers during the year. See Note 15 to the consolidated financial
statements for more information regarding stock-based compensation.
54
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
At December 31, 2015, our total assets amounted to $3.4 billion, a 4.5% increase from 2014. The following table
presents detailed information regarding the nature of changes in our loans and deposits in 2014 and 2015:
($ in thousands)
2015
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
2014
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
due to
Expiration
of Loss
Share
Agreement
Balance at
end of
period
Total
percentage
growth
Internal
percentage
growth (1)
$ 2,268,580
127,594
2,396,174
560,230
583,903
548,255
180,317
88,375
747
384,127
349,952
$ 2,695,906
$ 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
147,705
(24,953)
122,752
98,808
42,975
88,437
6,299
(11,963)
(747)
(54,308)
(54,122)
115,379
(23,978)
(43,042)
(67,020)
77,580
26,490
699
11,294
(27,712)
(572)
(67,614)
(75,278)
(55,113)
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
2,416,285
102,641
2,518,926
659,038
626,878
636,692
186,616
76,412
−
329,819
295,830
2,811,285
39,673
(39,673)
−
2,268,580
127,594
2,396,174
−
−
−
−
−
−
−
−
−
560,230
583,903
548,255
180,317
88,375
747
384,127
349,952
2,695,906
6.5%
-19.6%
5.1%
17.6%
7.4%
16.1%
3.5%
-13.5%
-100.0%
-14.1%
-15.5%
4.3%
0.7%
-39.3%
-2.7%
16.1%
4.8%
0.1%
6.7%
-23.9%
-43.4%
-15.0%
-17.7%
-2.0%
6.5%
-19.6%
5.1%
17.6%
7.4%
16.1%
3.5%
-13.5%
-100.0%
-14.1%
-15.5%
4.3%
-1.1%
-20.5%
-2.7%
16.1%
4.8%
0.1%
6.7%
-23.9%
-43.4%
-15.0%
-17.7%
-2.0%
(1) Excludes the impact of the transfer of loans from covered status to non-covered status on July 1, 2014 due to the expiration of one of our loss-
sharing agreements, but includes growth or declines in these loans after date of transfer. Also, excludes the impact of acquisitions in the year
of acquisition, but includes growth or declines in acquired operations after the date of acquisition.
In 2015, as derived from the table above, our total loans increased by $123 million, or 5.1%. During that period,
we experienced internal growth in our non-covered loan portfolio of $148 million, or 6.5%, while our covered
loans declined by $25 million, or 19.6%. We expect continued growth in our non-covered loan portfolio in 2016,
as we have recently expanded into higher growth market areas, and we had experienced bankers join our
company over the past twelve months. We expect our covered loans to continue to decline as a result of
normal pay-downs, foreclosures, and charge-offs.
In 2014, as derived from the table above, our total loans decreased by $67 million, or 2.7%. The increase in the
ending balance of our non-covered loan portfolio was due to the transfer of $39.7 million of loans from covered
status to non-covered status on July 1, 2014 upon the scheduled expiration of one of our loss-sharing
agreements on June 30, 2014. Excluding that transfer, we experienced a net decline in our non-covered loan
55
portfolio of $24 million, or 1.1%, which we believe was due to slow economic recovery in many of the our
market areas, as well as temporary pressures from new internal loan processes that we implemented in 2014
designed to enhance loan quality. Covered loans declined by $82.7 million during 2014, with approximately half
of the decline due to the aforementioned transfer of loans to non-covered status and the other half as a result
of normal pay-downs, foreclosures, and charge-offs.
During 2015, we experienced a net increase in total deposits of $115.4 million, or 4.3%, which resulted from
significant growth in our low-cost core deposit accounts (checking, money market and savings) offsetting
declines in our time deposit accounts. We experienced growth of $236.5 million in our core deposit accounts,
compared to declines of $121.1 million in time deposits. As previously discussed, our net interest margin
benefited from this shift.
During 2014, we experienced a net decline in total deposits of $55.1 million. Growth of $116 million in our core
deposit accounts was more than offset by a $171 million decline in time deposits. With the low loan growth
experienced in 2014, we were able to maintain pricing discipline on our rate sensitive deposits, which resulted in
the loss of some of those balances.
Our overall liquidity decreased slightly in 2015 compared to 2014, primarily as a result of loan growth and the
redemption of $63.5 million of our SBLF preferred stock. Our liquid assets (cash and securities) as a percentage
of our total deposits and borrowings decreased from 21.2% at December 31, 2014 to 19.7% at December 31,
2015.
Our capital ratios declined in 2015 primarily as a result of the aforementioned repayment of $63.5 million in
SBLF stock. Earnings of $27 million during 2015 partially offset the impact of the repayment. All of our capital
ratios have significantly exceeded the regulatory thresholds for “well-capitalized” status for all periods covered
by this report. Our tangible common equity ratio was 8.13% at December 31, 2015, compared to 7.90% at
December 31, 2014 and 7.46% at December 31, 2013.
At December 31, 2015, our non-covered nonperforming assets to total non-covered assets was 2.37% compared
to 3.09% at December 31, 2014. The decrease is primarily due to on-going resolution of nonperforming assets
and improving credit quality.
As it relates to our covered assets, it has now been over six years since we acquired Cooperative Bank and five
years since we acquired The Bank of Asheville in failed bank acquisitions, and we have worked through many of
the problem assets related to these acquisitions. Our covered nonperforming assets have steadily declined over
the past two years from $71 million at December 31, 2013 to $19 million at December 31, 2014 to $12 million at
December 31, 2015.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components of our balance sheet at December 31,
2015, 2014, and 2013.
Our balance sheet mix has remained relatively stable over the past three years. On the asset side, our interest-
earning assets have increased while the FDIC indemnification asset and foreclosed real estate percentages have
decreased. In 2015, we experienced growth in loans that resulted in loans increasing from 73% of total assets to
74% of total assets. In 2014, we experienced a net decline in loans resulting in loans decreasing from 76% of
total assets to 73% of total assets. In 2014, we used a portion of our excess cash to invest in held to maturity
securities, which increased from 2% of total assets to 6% of total assets.
On the liability side, as previously discussed, in 2015, we experienced a net increase in total deposits and
56
continued to experience shifts from time deposits to our transaction accounts. We also obtained $70 million
additional borrowings in 2015 to help fund the loan growth that we experienced during the year. In 2014, we
experienced a net decline in total deposits. We also obtained $70 million in additional borrowings in 2014 to
enhance our cash position and in anticipation of future loan growth, which resulted in borrowings increasing
from 1% of total assets to 4% of total assets.
Shareholders’ equity decreased from 12% of total liabilities and shareholders’ equity at December 31, 2014 to
10% at December 31, 2015 as a result of redeeming $63.5 million in SBLF stock during the year.
Securities
Information regarding our securities portfolio as of December 31, 2015, 2014, and 2013 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 $320.2 million, $336.7 million, and $223.1 million at December 31, 2015, 2014, and
2013, respectively. The decrease in securities in 2015 was primarily due to securities paydowns, maturities, and
calls. The increase in securities during 2014 was the result of our late-2014 decision to invest approximately
$125 million of excess cash into securities in an effort to increase our earning asset yield. The $125 million
investment was made in the form of government enterprise mortgage-backed securities that had an average
yield of 2.43%, an average life of 7.1 years and an average duration of 6.1 years. These securities were classified
in the held to maturity category.
The majority of our “government-sponsored enterprise” securities carry one maturity date, often with an issuer
call feature. At December 31, 2015, of the $19.0 million (carrying value) in government-sponsored enterprise
securities, $7.0 million were issued by the Federal Home Loan Bank system, $9.0 million were issued by Freddie
Mac/Fannie Mae, and the remaining $3.0 million were issued by the Federal Farm Credit Bank system.
Our $224.1 million in total mortgage-backed securities have all been issued by 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.
57
At December 31, 2015, our $24.9 million investment in corporate bonds was comprised of the following:
($ in thousands)
Issuer
Bank of America
Goldman Sachs
JP Morgan Chase
Citigroup
Financial Institutions, Inc.
First Citizens Bancorp (South Carolina) Trust Preferred Security
Total investment in corporate bonds
(1) Ratings issued by S&P
(2) Rating issued by Kroll Bond Rating (KBRA)
Issuer
Ratings
BBB+
BBB+
A-
BBB+
BBB-
Not Rated
(1)
(1)
(1)
(1)
(2)
Maturity Date
Amortized Cost
Market Value
1/11/2023
1/22/2023
1/25/2023
3/1/2023
4/15/2030
6/15/2034
$ 5,021
5,126
5,031
5,038
4,000
1,000
$ 25,216
4,939
5,074
5,001
5,012
3,980
940
24,946
We have concluded that any unrealized losses associated with our corporate bonds are due to coupon rate
considerations and not due to credit concerns.
We held $154.6 million in securities held to maturity at December 31, 2015, which had a fair value that
exceeded their carrying value by $2.5 million. Approximately $102.5 million of the securities held to maturity
are mortgage-backed securities that have been issued by either Freddie Mac or Fannie Mae. The remaining
$52.1 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
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, 2015, 2014 and 2013, net unrealized losses of $1.2 million, $0.7 million and $2.0 million,
respectively, were included in the carrying value of securities classified as available for sale. 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 losses, net of
applicable deferred income taxes, of $0.7 million, $0.4 million, and $1.2 million have been reported as part of a
separate component of shareholders’ equity (accumulated other comprehensive income) as of December 31,
2015, 2014, and 2013, respectively.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 2.23% at
December 31, 2015. The expected weighted average life of the available for sale portfolio using the call date for
above-market callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected
life for mortgage-backed securities, was 5.5 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 3.24% at
December 31, 2015. The expected weighted average life of the held to maturity portfolio using the call date for
above-market callable bonds, the expected life for mortgage-backed securities, and the maturity date for all
other securities, was 4.0 years.
58
The following table provides the names of issuers for which the Company has investment securities totaling in
excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of
December 31, 2015. All of these securities are issued by government sponsored corporations.
($ in thousands)
Issuer
Freddie Mac
Fannie Mae
Small Business Administration
Ginnie Mae
Total
Loans
Amortized Cost
$ 80,835
62,717
46,592
43,838
$ 233,982
Fair Value
80,525
62,301
45,864
43,623
232,313
% of
Shareholders’
Equity
23.6%
18.3%
13.6%
12.8%
Table 10 provides a summary of the loan portfolio composition of our total loans at each of the past five year
ends.
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
our 32 county market area, which is located in western, central and eastern North Carolina, four counties in
southern Virginia and three counties in northeastern South Carolina. The diversity of the region’s economic
base has historically provided a stable lending environment.
As previously discussed, in our acquisitions of Cooperative Bank and The Bank of Asheville, we entered into loss
share agreements with the FDIC, which afforded 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 became 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, 2015.
On July 1, 2014, one of the Company’s loss share agreements with the FDIC expired. The agreement that
expired related to the non-single family assets of Cooperative Bank, a failed bank acquisition from June 2009.
Accordingly, the remaining balances associated with these loans and foreclosed real estate were transferred
from the covered portfolio to the non-covered portfolio on July 1, 2014. The Company will bear all future losses
on this portfolio of loans and foreclosed real estate. Immediately prior to the transfer to non-covered status,
the loans in this portfolio had a carrying value of $39.7 million and the foreclosed real estate in this portfolio had
a carrying value of $3.0 million. Of the $39.7 million in loans that lost loss share protection, approximately $9.7
million were on nonaccrual status and $2.1 million were classified as accruing troubled debt restructurings as of
July 1, 2014. Additionally, approximately $1.7 million in allowance for loan losses associated with this portfolio
of loans was transferred to the allowance for loan losses for non-covered loans on July 1, 2014.
In 2015, loans outstanding increased $122.8 million, or 5.1% to $2.5 billion. The 2015 increase was primarily due
to improved loan demand in our market areas, as well as the hiring of several experienced bankers during the
year. In 2014, total loans outstanding decreased $67.0 million, or 2.7% to $2.4 billion. We believe that 2014
loan growth was impacted by a relatively slow economic recovery in many of the Company’s market areas, as
well as temporary pressures from new internal loan processes that we implemented in 2014 designed to
enhance loan quality. Additionally, total covered loans declined by $82.7 million in 2014 (see discussion above
regarding a transfer to non-covered status).
59
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 presents a five year history of loans outstanding by type. Real estate construction loans peaked at 23%
of total loans in 2007 prior to the recession. These loans experienced the highest losses during the recession
and, we, like many banks, tightened underwriting criteria for those loans during that period. As a result, our
percentage of real estate construction loans to total loans steadily declined to 12% by December 31, 2013,
where it has remained at each year end since. Residential real estate loans have declined from 34% of total
loans at December 31, 2013 to 31% of total loans at December 31, 2015, as many customers have taken
advantage of the historically low level of interest rates and refinanced their home loans with long-term fixed
rate loans, which we typically sell in the secondary market. Commercial real estate loans as a percentage of
total loans has increased steadily over the past five years and amounted to 38% of all loans at December 31,
2015. We participated in the Small Business Fund beginning in 2011, which provided monetary incentives for
our bank to originate small business loans, which we typically secure with real estate collateral. Additionally,
during 2015, we hired several experienced community bankers who originated a significant amount of business
loans secured by real estate. Our emphasis on this type of loan is consistent with our community banking
strategy.
Table 11 provides a summary of scheduled loan maturities over certain time periods, with fixed rate loans and
adjustable rate loans shown separately. Approximately 14% of our accruing loans outstanding at December 31,
2015 mature within one year and 58% of total loans mature within five years. As of December 31, 2015, the
percentages of variable rate loans and fixed rate loans as compared to total performing loans were 33% and
67%, 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
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.
60
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 a 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. Non-covered nonperforming assets amounted to $95 million at December 31, 2014 compared
to $82 million at December 31, 2013. As discussed above, during 2014, we transferred approximately $15
million in nonperforming assets from covered status to non-covered status, which caused the increase from
2013 to 2014. At December 31, 2015, non-covered nonperforming assets amounted to $77.2 million, a decrease
of $18.1 million from December 31, 2014. The decline in non-covered nonperforming assets is primarily due to
on-going resolution of nonperforming assets and improving credit quality. At December 31, 2015, the ratio of
non-covered nonperforming assets to total non-covered assets was 2.37% compared to 3.09% and 2.78% at
December 31, 2014 and 2013, respectively.
Total covered nonperforming assets have significantly declined during the past two years, amounting to $12.1
million at December 31, 2015 compared to $18.7 million and $70.6 million at December 31, 2014 and 2013,
respectively, with $15 million of the 2014 decline attributable to the transfer to non-covered status. Within this
category, foreclosed real estate has declined to $0.8 million compared to $2.4 million at December 31, 2014 and
$24.5 million at December 31, 2013. The Company continues to experience good property sales activity,
particularly along the North Carolina coast, where most of the Company’s covered foreclosed properties are
located.
Table 12a presents our nonperforming assets at December 31, 2015 by general geographic region and further
segregated into “covered” nonperforming assets and “non-covered” nonperforming assets.
61
The following is the composition, by loan type, of all of our nonaccrual loans at each period end, as classified for
regulatory purposes:
($ 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,
2015 (1)
$ 2,964
4,704
23,829
3,525
12,571
217
$ 47,810
At December 31,
2014 (1)
3,575
10,079
26,916
4,214
15,190
600
60,574
The following segregates our nonaccrual loans at December 31, 2015 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
$ −
52
5,007
383
2,374
̶
$ 7,816
Non-covered
Nonaccrual
Loans
2,964
4,652
18,822
3,142
10,197
217
39,994
Total
Nonaccrual
Loans
2,964
4,704
23,829
3,525
12,571
217
47,810
The following segregates our nonaccrual loans at December 31, 2014 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
$ 104
1,140
7,724
339
1,201
̶
$ 10,508
Non-covered
Nonaccrual
Loans
3,471
8,939
19,192
3,875
13,989
600
50,066
Total
Nonaccrual
Loans
3,575
10,079
26,916
4,214
15,190
600
60,574
The nonaccrual tables above generally indicate that we experienced decreases in all categories of nonaccrual
loans, with the “real estate – construction” category experiencing the largest decline. The decline in nonaccrual
loans is due to our on-going focus to resolve our nonperforming loans and improving credit quality.
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 $1
million of covered loans that were performing in accordance with their contractual terms at December 31, 2015
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, 2015 (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
62
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, 2014 to December 31, 2015 our asset quality improved, with total non-covered classified and
nonaccrual loans decreasing from $125 million at December 31, 2014 to $102 million at December 31, 2015.
Foreclosed real estate includes primarily foreclosed properties. Non-covered foreclosed real estate amounted
to $9.2 million, $9.8 million, and $12.3 million at December 31, 2015, 2014, and 2013, respectively. Foreclosed
property levels have steadily declined in a manner consistent with our strategy implemented in 2012 to
accelerate the disposition of foreclosed properties.
At December 31, 2015, 2014 and 2013, we also held $0.8 million, $2.4 million, and $24.5 million, respectively, in
foreclosed real estate subject to loss share agreements with the FDIC. The declines in 2014 and 2015 were
primarily due to sales of these foreclosed properties as a result of increased property sales activity, particularly
along the North Carolina coast, where most of our covered foreclosed properties are located.
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,
2015 (1)
$ 3,867
3,789
2,338
$ 9,994
At December 31,
2014 (1)
4,964
2,878
4,279
12,121
The following segregates our foreclosed real estate at December 31, 2015 into covered and non-covered:
Vacant land
1-4 family residential properties
Commercial real estate
Total foreclosed real estate
Covered
Foreclosed Real
Estate
$ 277
247
282
$ 806
Non-covered
Foreclosed Real
Estate
3,590
3,542
2,056
9,188
Total Foreclosed
Real Estate
3,867
3,789
2,338
9,994
The following segregates our foreclosed real estate at December 31, 2014 into covered and non-covered:
Vacant land
1-4 family residential properties
Commercial real estate
Total foreclosed real estate
Covered
Foreclosed Real
Estate
$ 639
866
845
$ 2,350
Non-covered
Foreclosed Real
Estate
4,325
2,012
3,434
9,771
Total Foreclosed
Real Estate
4,964
2,878
4,279
12,121
63
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses”
for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in
which such loans, in management’s opinion, become uncollectible. The recoveries realized during the period
are credited to this allowance. We 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 recent 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
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 $28.6 million at December 31, 2015 compared to $40.6 million at
December 31, 2014 and $48.5 million at December 31, 2013. At December 31, 2015, 2014, and 2013, $1.8
million, $2.3 million, and $4.2 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 $26.8 million, $38.3 million, and $44.3 million, respectively, at
those dates.
Our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a
significant component of estimating the current allowance for loan losses that is necessary. Thus, older years
(and parts thereof) systematically age out and are excluded from the analysis as time goes on. The final periods
of high net charge-offs we experienced during the peak of the recession dropped out of the analysis in 2015 and
were replaced by the more modest levels of net charge-offs now being experienced. The fourth quarter of 2015
marked our twelfth consecutive quarter of annualized net charge-offs related to non-covered loans being less
than 1.00%, whereas at the peak of the recession, that ratio was frequently over 1.00%. Accordingly, the
relatively low provision for non-covered loans recorded in 2015 resulted in our non-covered allowance for loan
loss declining to a more normalized level following the elevated amounts we maintained during and
immediately following the recession. In 2016, we expect that it is likely we will record a higher amount of
provision for loan losses than we did in 2015, as we provide for on-going loan charge-offs and expected new
loan growth.
The ratio of the allowance for non-covered loan losses to non-covered loans was 1.11%, 1.69%, and 1.96%, as of
December 31, 2015, 2014, and 2013, respectively. The decline in this ratio during 2015 was the result of $13.6
64
million in net charge-offs recorded that reduced the allowance for loan losses and which significantly exceeded
the $2.0 million added to the allowance for loan losses via provisions for loan losses.
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, 2015 and 2014 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 2015 and 2014 activity for the allowance for loan losses
segregated into covered and non-covered activity.
Net loan charge-offs of non-covered loans amounted to $13.6 million in 2015, $14.7 million in 2014, and $15.6
million in 2013. Net non-covered charge-offs as a percentage of average non-covered loans represented 0.58%,
0.65%, and 0.72% during 2015, 2014, and 2013, respectively. The trend of lower net charge-offs is associated
with lower levels of nonperforming loans that have been impacted with improvements in the economy and real
estate prices.
We recorded ($2.3 million), $3.3 million, and $12.9 million in net charge-offs (recoveries) of covered loans
during 2015, 2014, and 2013, respectively. In 2015, we received recoveries of $3.6 million, which more than
offset charge-offs of $1.3 million. The significant improvements in 2015 and 2014 were primarily a result of
lower levels of classified covered loans.
Deposits
At December 31, 2015, deposits outstanding amounted to $2.811 billion, an increase of $115 million from the
$2.696 billion at December 31, 2014. During 2015 we experienced strong growth in our noninterest-bearing and
interest-bearing checking accounts, and declines in our higher cost time deposits, including brokered time
deposits and internet time deposits.
At December 31, 2014, deposits outstanding amounted to $2.696 billion, a decrease of $55 million from the
$2.751 billion at December 31, 2013. Similar to 2015, during 2014, we experienced strong growth in our
noninterest-bearing and interest-bearing checking accounts. However, these increases were offset by declines
in our higher cost time deposits, including brokered time deposits and internet time deposits. We were able to
65
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.
The nature of our deposit growth is illustrated in the table on page 55. 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
2015
23%
22%
23%
7%
3%
0%
12%
10%
100%
2014
21%
22%
20%
7%
3%
0%
14%
13%
100%
2013
18%
20%
20%
6%
4%
0%
16%
16%
100%
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.
Table 15 presents the average amounts of our deposits and the average yield paid for those deposits for the
years ended December 31, 2015, 2014, and 2013.
As of December 31, 2015, we held approximately $403.5 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, 2015. This table shows that
81% 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 $186.4 million at December 31, 2015, $116.4 million at December 31, 2014
and $46.4 million at December 31, 2013. In 2015, we obtained new borrowings of $70 million from a low cost
funding source to help support our loan growth experienced during the year. In 2014, we obtained new
borrowings of $70 million from a low cost funding source in order to enhance our cash position and in
anticipation of future loan growth.
Table 2 shows that average borrowings were $149.8 million in 2015, $99.4 million in 2014, and $46.4 million in
2013.
66
At December 31, 2015, the Company had four sources of readily available borrowing capacity – 1) an
approximately $589 million line of credit with the FHLB, of which $140 million and $70 million was outstanding
at December 31, 2015 and 2014, respectively, 2) a $50 million overnight federal funds line of credit with a
correspondent bank, of which none was outstanding at December 31, 2015 or 2014, and 3) a $35 million federal
funds line of credit with a correspondent bank, of which none was outstanding at December 31, 2015, and 4) an
approximately $88 million line of credit through the Federal Reserve Bank of Richmond’s (FRB) discount window,
of which none was outstanding at December 31, 2015 or 2014.
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. For the year ended December 31, 2015, the average amount of FHLB borrowings
outstanding was approximately $103 million with a weighted average interest rate for the year of 0.54%. The
maximum amount of short-term FHLB borrowings outstanding at any month-end during 2015 was $180 million.
For the year ended December 31, 2014, the average amount of FHLB borrowings outstanding was approximately
$53 million with a weighted average interest rate for the year of 0.27%. The maximum amount of short-term
FHLB borrowings outstanding at any month-end during 2014 was $70 million.
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 at both December 31, 2015 and 2014,
as a result of our pledging letters of credit backed by the FHLB for public deposits at each of those dates.
Our two correspondent bank relationships allow us to purchase up to $50 million and $35 million in federal
funds on an overnight, unsecured basis (federal funds purchased). We had no borrowings under these lines at
December 31, 2015 or 2014. There were no federal funds purchased outstanding at any month-end during 2015
or 2014.
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, 2015, the available line of credit was approximately $88 million. At December 31,
2015 and 2014, we had no borrowings outstanding under this line. The maximum amount of FRB borrowings
outstanding at any month-end during 2015 or 2014 was $0 and $20 million, respectively.
In addition to the lines of credit described above, we also had a total of $46.4 million in trust preferred security
debt outstanding at December 31, 2015 and 2014. 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 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.
67
As noted above, in addition to internally generated liquidity sources, at December 31, 2015, we had the ability
to obtain borrowings from the following three sources – 1) an approximately $589 million line of credit with the
FHLB, 2) a $50 million overnight federal funds line of credit with a correspondent bank, 3) a $35 million federal
funds line with a correspondent bank, and 4) an approximately $88 million line of credit through the FRB’s
discount window.
Our overall liquidity decreased slightly in 2015 compared to 2014 due primarily to loan growth and the
redemption of the $63.5 million in SBLF stock. Our liquid assets (cash and securities) as a percentage of our total
deposits and borrowings decreased from 21.2% at December 31, 2014 to 19.7% at December 31, 2015.
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, 2015. Any of our $140 million in outstanding borrowings with the FHLB may be accelerated immediately by
the FHLB in certain circumstances, including material adverse changes in our condition or if our qualifying
collateral is less than the amount required under the terms of the borrowing agreement.
In the normal course of business there are various outstanding commitments and contingent liabilities such as
commitments to extend credit, which are not reflected in the financial statements. The following table presents
a summary of our outstanding loan commitments as of December 31, 2015:
($ 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
$ 81
69
$ 150
Variable Rate
156
218
374
Total
237
287
524
At December 31, 2015 and 2014, we also had $13.1 million and $14.1 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
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, none of which resulted in any loss to the Company. We
expect any draws under existing commitments to be funded through normal operations.
68
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, 2015 amounted to $342.2 million compared to $387.7 million at
December 31, 2014 and $371.9 million at December 31, 2013. The two basic components that typically have the
largest impact on our shareholders’ equity are net income, which increases shareholders’ equity, and dividends
declared, which decreases shareholders’ equity. Additionally, any stock issuances (redemptions) can
significantly increase (decrease) shareholders’ equity.
In 2015, the most significant factors that impacted our equity were 1) the $63.5 million redemption of our Series
B Preferred Stock issued to the U.S. Treasury in 2011 under the Small Business Lending Fund, which reduced
equity (see Note 19 to our consolidated financial statements), 2) the $27.0 million net income reported for 2015,
which increased equity, 3) common stock dividends declared of $6.3 million, which reduced equity. Another
factor negatively impacting equity in 2015 was a $2.7 million decrease in accumulated other comprehensive
income that was caused primarily by an increase in our pension liability. The increase in the pension liability was
primarily due to underperformance of our pension plan assets during 2015 (see Note 12 to the consolidated
financial statements). See the Consolidated Statements of Shareholders’ Equity within the consolidated
financial statements for disclosure of other less significant items affecting shareholders’ equity.
In 2014, the most significant factors that impacted our equity were 1) the $25.0 million net income reported for
2014, 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. Another significant factor negatively
impacting equity in 2014 was a $3.3 million decrease in accumulated other comprehensive income 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 liability. Our policy is to
use the Citigroup Pension Index yield curve in the computation of the pension liability. At December 31, 2014,
that index had a weighted average rate of 3.82%, which was a decline from the rate of 4.78% at December 31,
2013 (see Note 12 to the consolidated financial statements). See the Consolidated Statements of Shareholders’
Equity within the consolidated financial statements for disclosure of other less significant items affecting
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), 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.
At December 31, 2014 and 2013, we had $63.5 million in Series B Preferred Stock that was issued in 2011 to the
U.S. Treasury. This stock qualified as Tier I capital under all current and proposed regulatory rules. For 2013 and
2014, we paid preferred dividends on that stock at an annual rate of 1%. In June 2015, we redeemed $32.5
69
million in the Series B Preferred Stock and in October 2015, we redeemed the remaining $31 million outstanding
(see additional discussion in Note 19 to the consolidated financial statements).
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 currently have $46.4 million in trust
preferred securities outstanding, all of which qualify as Tier I capital under both current and forthcoming
regulatory standards.
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 Federal
Reserve System (the “FED”). 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.
In 2013, the FED approved final rules implementing the Basel Committee on Banking Supervision capital
guidelines, referred to a “Basel III.” The final rules established a new “Common Equity Tier I” ratio; new higher
capital ratio requirements, including a capital conservation buffer; narrowed the definitions of capital; imposed
new operating restrictions on banking organizations with insufficient capital buffers; and increased the risk
weighting of certain assets. The final rules became effective January 1, 2015 for the Company.
Common Equity Tier I capital (“CET1”) is comprised of common stock and related surplus, plus retained earnings,
and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier I capital is
comprised of Common Equity Tier I capital plus Additional Tier I capital, which for the Company includes non-
cumulative perpetual preferred stock and trust preferred securities. 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 regulations.
Under the Basel III Capital Rules, the following are the initial minimum capital ratios applicable to the Company
and the Bank as of January 1, 2015:
• 4.5% CET1 to risk-weighted assets;
• 6.0% Tier I capital (that is, CET1 plus Additional Tier I capital) to risk-weighted assets;
• 8.0% total capital (that is, Tier I capital plus Tier II capital) to risk-weighted assets; and
• 4.0% Tier I leverage ratio (that is Tier I capital to quarterly average total assets.
The Basel III Capital Rules also introduce a new “capital conservation buffer,” composed entirely of CET1, on top
of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during
periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum
but below the capital conservation buffer will face constraints on dividends, equity repurchases and
compensation based on the amount of the shortfall. The implementation of the capital conservation buffer
began on January 1, 2016 at 0.625% and will be phased in over a four-year period (increasing by that amount on
each subsequent January 1, until it reaches 2.5% on January 1, 2019). Thus, when fully phased-in on January 1,
2019, the Company and the Bank will be required to maintain this additional capital conservation buffer of 2.5%
of CET1, resulting in the following minimum capital ratios:
70
• 4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a
minimum ratio of CET1 to risk-weighted assets of at least 7%;
• 6.0% Tier I capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in
a minimum Tier I capital ratio of at least 8.5%;
• 8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in
a minimum total capital ratio of at least 10.5%; and
• 4.0% Tier I leverage ratio
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 as of January 1, 2015 are as follows –
• Common Equity Tier I Capital Ratio of at least 6.50%;
• Tier I Capital Ratio of at least 8.00%;
• 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, 2015, 2014, and 2013 – see Note 16 to the consolidated financial statements
for a table that presents the Bank’s regulatory ratios.
Table 21 presents our regulatory capital ratios as of December 31, 2015, 2014, and 2013. All of our capital ratios
have significantly exceeded the minimum regulatory thresholds for all periods covered by this report.
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, 2015, our total risk-based capital ratio
was 14.45% 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 8.13% at December 31, 2015 compared to 7.90% at December 31, 2014.
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, 2015 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
71
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, 2015.
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 4.13% (realized in 2015) 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% (the rate increased to 3.50%
on December 17, 2015). 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, 2015, approximately 76% 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, 2015, 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, 2015, we had $961 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,
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, 2015 are deposits totaling $1.45
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.
72
The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment
in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and
is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-
term interest rates are substantially the same as long-term interest rates. As a result of the prolonged
negative/fragile economic environment, the Federal Reserve took steps to suppress long-term interest rates in
an effort to boost the housing market, increase employment, and stimulate the economy, which resulted in a
flat interest rate curve. A flat interest rate curve is an unfavorable interest rate environment for many banks,
including the Company, as short-term interest rates generally drive our deposit pricing and longer-term interest
rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields
and deposit rates narrows, which pressures our net interest margin.
While there have been periods in the last few years that the yield curve has steepened somewhat, it currently
remains relatively flat. This flat yield curve and the intense competition for high-quality loans in our market
areas have limited our ability to charge higher rates on loans, and thus we continue to experience downward
pressure on our loan yields and net interest margin.
As it relates to deposits, the Federal Reserve made no changes to the short term interest rates it sets directly
from 2008 until mid-December 2015, and since that time we have been able to reprice many of our maturing
time deposits at lower interest rates. We have also been 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 and with the Federal Reserve recently increasing short-term interest rates by 25 bps, 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.
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 $4.8
million and $16.0 million for 2015 and 2014, respectively, is less predictable and can 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. However, with the remaining loan discount on accruing loans having naturally declined
since inception, amounting to only $13.1 million at December 31, 2015 (compared to $17.6 million a year
earlier), we expect that loan discount accretion, and the related indemnification asset expense associated with
the accretion, will again decline in 2016. If that occurs, our net interest margin will be negatively impacted and
our noninterest income will be positively impacted (due to the lower indemnification asset expense).
Based on our most recent interest rate modeling, which assumes no changes in interest rates for 2016 (federal
funds rate = 0.50%, prime = 3.50%), we project that our net interest margin for 2016 will experience additional
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
73
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.”
74
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 (reversal) 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
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)
2015
$ 126,655
6,908
119,747
(780)
120,527
18,764
98,131
41,160
14,126
27,034
(603)
—
26,431
1.34
1.30
Year Ended December 31,
2013
2014
2012
139,832
8,223
131,609
10,195
121,414
14,368
97,251
38,531
13,535
24,996
(868)
—
24,128
1.22
1.19
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)
2011
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
$ 0.32
0.32
0.32
0.32
0.32
19.92
15.00
18.74
16.96
13.56
$ 3,362,065
2,416,285
102,641
2,518,926
28,583
67,171
2,811,285
186,394
342,190
$ 3,230,302
2,320,503
114,099
2,434,602
2,936,624
2,687,381
2,218,246
376,287
0.82%
8.04%
4.13%
8.13%
89.60%
1.13%
1.11%
2.66%
2.37%
0.46%
0.58%
88
812
75
19.65
15.55
18.47
16.08
12.63
3,218,383
2,268,580
127,594
2,396,174
40,626
67,893
2,695,906
116,394
387,699
3,219,915
2,274,554
159,777
2,434,331
2,907,098
2,723,758
2,294,330
383,055
0.75%
7.73%
4.58%
7.90%
88.88%
1.70%
1.69%
3.54%
3.09%
0.74%
0.65%
87
798
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
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
Table 2 Average Balances and Net Interest Income Analysis
2015
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
Year Ended December 31,
2014
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2013
Avg.
Rate
Interest
Earned
or Paid
$ 2,434,602
296,181
52,449
4.84%
2.13%
6.60%
$ 117,872 $ 2,434,331
167,844
53,888
6,296
3,463
5.49%
2.06%
6.28%
$ 133,641 $ 2,419,679
175,184
54,785
3,461
3,383
5.85%
1.95%
6.22%
$ 141,616
3,410
3,410
153,392
0.43%
658
251,035
0.34%
849
155,464
0.38%
586
2,936,624
61,212
75,452
157,014
$ 3,230,302
4.37%
128,289
2,907,098
81,290
4.86%
141,334
2,805,112
80,659
5.31%
149,022
76,463
155,064
$ 3,219,915
77,252
245,435
$ 3,208,458
$ 568,329 0.06%
0.13%
0.05%
0.70%
0.39%
582,407
184,821
410,692
322,205
$ 335
765
92
2,856
1,271
$ 535,738
552,940
176,362
542,303
387,607
0.06%
0.11%
0.05%
0.81%
0.43%
$ 322
630
88
4,373
1,659
$ 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
2,068,454
149,792
0.26%
1.06%
5,319
1,589
2,194,950
99,380
0.32%
1.16%
7,072
1,151
2,334,353
46,394
0.43%
2.21%
9,960
1,025
2,218,246
0.31%
6,908
2,294,330
0.36%
8,223
2,380,747
0.46%
10,985
618,927
16,842
376,287
528,808
13,722
383,055
444,679
20,262
362,770
$ 3,230,302
$ 3,219,915
$ 3,208,458
4.13%
$ 121,381
4.58%
$ 133,111
4.06%
3.26%
4.50%
3.25%
$ 138,037
4.92%
4.85%
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
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 ($39,000), $143,700, and ($192,900) for 2015, 2014, and 2013, respectively.
Includes accretion of discount on covered loans of $4,751,000, $16,009,000, and $20,200,000 in 2015, 2014, and 2013, respectively.
Includes tax-equivalent adjustments of $1,634,000, $1,502,000, and $1,511,000 in 2015, 2014, and 2013, respectively, to reflect the federal and state
tax benefit of the tax-exempt securities (using a 39% combined tax rate), reduced by the related nondeductible portion of interest expense.
76
Table 3 Volume and Rate Variance Analysis
($ 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
Borrowings
Total interest expense
Year Ended December 31, 2015
Year Ended December 31, 2014
Change Attributable to
Change Attributable to
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$ 14
2,687
(93)
(375)
2,233
19
36
4
(988)
(269)
(1,198)
559
(639)
(15,783)
148
173
184
(15,278)
(6)
99
−
(529)
(119)
(555)
(121)
(676)
(15,769)
2,835
80
(191)
(13,045)
13
135
4
(1,517)
(388)
(1,753)
438
(1,315)
831
(147)
(56)
342
970
4
(11)
6
(572)
(406)
(979)
892
(87)
(8,806)
198
29
(79)
(8,658)
(158)
(259)
(35)
(880)
(577)
(1,909)
(766)
(2,675)
(7,975)
51
(27)
263
(7,688)
(154)
(270)
(29)
(1,452)
(983)
(2,888)
126
(2,762)
Net interest income (tax-equivalent)
$ 2,872
(14,602)
(11,730)
1,057
(5,983)
(4,926)
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
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
2015
$ 11,648
10,906
2,532
2,580
1,665
29,331
(2,504)
1,018
(8,615)
(1)
(465)
$ 18,764
Year Ended December 31,
2014
13,706
10,019
2,726
2,733
1,311
30,495
(1,924)
(1,919)
(12,842)
786
(228)
14,368
2013
12,752
9,318
2,907
2,132
1,120
28,229
1,333
367
(6,824)
532
(148)
23,489
77
Table 5 Noninterest Expenses
($ in thousands)
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Amortization of intangible assets
FDIC insurance expense
Repossession and collection expenses – non-covered
Repossession and collection expenses – covered, net
of FDIC reimbursements
Telephone and data lines
Stationery and supplies
Data processing expense
Dues and subscription expense
Legal and audit
Outside consultants
Non-credit losses
Severance expenses
Branch consolidation expense
Other operating expenses
Total
Table 6 Income Taxes
($ in thousands)
Current - Federal
- State
Deferred - Federal
- State
Total tax expense
Effective tax rate
2015
$ 47,660
9,134
56,794
7,358
3,749
722
2,394
2,167
(54)
2,133
2,039
1,935
1,710
1,689
1,677
360
221
−
13,237
$ 98,131
Year Ended December 31,
2014
46,071
9,086
55,157
7,362
3,931
777
3,988
2,092
(861)
1,988
1,710
1,654
1,717
1,955
1,663
309
512
976
12,321
97,251
2015
$ 9,149
1,436
3,205
336
$ 14,126
2014
1,316
903
10,104
1,212
13,535
2013
45,120
9,644
54,764
7,123
4,364
860
2,803
2,216
1,142
1,489
2,078
̶
1,583
1,204
2,460
426
1,895
̶
12,212
96,619
2013
9,812
(467)
168
2,568
12,081
34.3%
35.1%
36.9%
78
Table 7 Distribution of Assets and Liabilities
2015
As of December 31,
2014
2013
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
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 $100,000 or more
Other time deposits
Total deposits
Borrowings
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
74%
5
5
7
91
2
2
−
2
−
2
1
100%
20%
19
19
5
12
9
84
5
1
90
10
100%
73%
5
6
5
89
3
2
1
2
−
2
1
100%
17%
18
17
6
15
11
84
4
̶
88
12
100%
76%
6
2
4
88
3
2
2
2
1
1
1
100%
15%
18
17
5
18
13
86
1
1
88
12
100%
Table 8 Securities Portfolio Composition
($ 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:
Mortgage-backed securities
State and local governments
Total securities held to maturity
2015
$ 18,972
121,553
24,946
143
165,614
102,509
52,101
154,610
As of December 31,
2014
27,521
129,510
865
122
158,018
124,924
53,763
178,687
2013
18,245
147,187
3,598
117
169,147
̶
53,995
53,995
Total securities
$ 320,224
336,705
223,142
Average total securities during year
$ 348,630
221,732
229,969
79
Table 9 Securities Portfolio Maturity Schedule
($ in thousands)
Securities available for sale:
Government-sponsored enterprise securities
Due after one but within five 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 five but within ten 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:
Mortgage-backed securities (2)
Due after one but within five years
Due after five but within ten years
Total
State and local governments
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total securities held to maturity
Total securities held to maturity
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total
As of December 31,
2015
Book
Value
Fair
Value
Book
Yield (1)
$ 19,000
19,000
500
75,702
41,023
5,249
122,474
20,216
5,000
25,216
88
500
94,702
61,239
10,249
88
$ 166,778
$ 76,289
26,220
102,509
835
12,549
37,286
1,431
52,101
835
88,838
63,506
1,431
$ 154,610
18,972
18,972
513
75,389
40,401
5,250
121,553
20,026
4,920
24,946
143
513
94,361
60,427
10,170
143
165,614
75,720
26,047
101,767
839
13,190
39,919
1,431
55,379
839
88,910
65,966
1,431
157,146
1.85%
1.85%
2.25%
1.90%
2.00%
3.37%
2.00%
3.20%
5.35%
3.63%
2.05%
2.25%
1.89%
2.40%
4.34%
2.05%
2.23%
1.88%
2.46%
2.03%
5.58%
5.54%
5.69%
4.52%
5.62%
5.58%
2.40%
4.36%
4.52%
3.24%
(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.
80
Table 10 Loan Portfolio Composition
As of December 31,
2015
2014
2013
2012
2011
% of
Total
Loans
Amount
% of
Total
Loans
Amount
% of
Total
Loans
Amount
Amount
% of
Total
Loans
Amount
% of
Total
Loans
$ 202,671
8%
$ 160,878
7%
$ 168,469
7%
$ 160,790
7%
$ 162,099
7%
308,969
12%
288,148
12%
305,246
12%
298,458
13%
363,079
15%
768,559
31%
789,871
33%
838,862
34%
815,281
34%
805,542
33%
232,601
9%
223,500
9%
227,907
9%
238,925
10%
256,509
11%
957,587
38%
882,127
37%
855,249
35%
789,746
33%
762,895
31%
47,666
2,518,053
2%
100%
50,704
2,395,228
2%
100%
66,533
2,462,266
3%
100%
71,933
2,375,133
3%
100%
78,982
2,429,106
3%
100%
873
$2,518,926
946
$2,396,174
928
$2,463,194
1,324
$2,376,457
1,280
$2,430,386
($ 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, 2015
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
$ 873
1%
$ 201,798
8%
$ 202,671
8%
$ 886
99%
3,741
4%
305,228
13%
308,969
12%
3,822
98%
75,657
74%
692,902
29%
768,559
31%
89,067
85%
10,606
10%
221,995
9%
232,601
9%
11,764
11%
945,823
39%
957,587
38%
12,113
14,594
̶
102,641
–
$ 102,641
̶
100%
47,666
2,415,412
2%
100%
47,666
2,518,053
2%
100%
̶
$ 120,482
873
$ 2,416,285
873
$2,518,926
88%
81%
̶
85%
($ 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, 2014.
81
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
Subtotal
Nonaccrual loans
Total loans
As of December 31, 2015
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
$ 46,665
32,370
93,106
4.37%
4.90%
5.06%
$ 11,546
28,835
157,648
5.16%
3.90%
4.92%
$ 18,173
14,859
176,518
2.47%
3.05%
3.71%
$ 76,384
76,064
427,272
4.04%
4.16%
4.45%
5,828
4.30%
30,126
4.10%
180,214
3.82%
216,168
3.87%
1,218
179,187
4.48%
4.82%
21,016
249,171
8.34%
5.00%
6,532
396,296
5.77%
3.71%
28,766
824,654
7.59%
4.34%
17,609
41,462
109,128
3,437
171,636
350,823
47,810
$ 398,633
5.02%
3.46%
5.45%
6.10%
4.94%
4.88%
78,741
15,309
728,941
13,205
836,196
1,085,367
─
$1,085,367
4.31%
4.42%
4.96%
6.17%
4.91%
4.93%
24,874
25,659
583,782
2.93%
4.17%
4.19%
121,224
82,430
1,421,851
4,315
638,630
14.56%
4.21%
20,957
1,646,462
1,034,926
─
$1,034,926
4.02%
2,471,116
47,810
$2,518,926
4.13%
3.86%
4.68%
7.88%
4.64%
4.54%
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in
this table.
82
Table 12 Nonperforming Assets
($ in thousands)
Non-covered nonperforming assets (1)
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
2015
2014
As of December 31,
2013
2012
2011
$ 39,994
28,011
−
68,005
−
9,188
$ 77,193
50,066
35,493
−
85,559
−
9,771
95,330
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
$ 7,816
3,478
−
11,294
806
$ 12,100
10,508
5,823
−
16,331
2,350
18,681
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
Total nonperforming assets
$ 89,293
114,011
152,588
202,351
263,271
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
3.15%
4.25%
4.70%
4.50%
5.80%
3.53%
2.66%
4.73%
3.54%
6.10%
4.79%
8.26%
6.24%
10.31%
8.00%
2.81%
3.77%
3.09%
2.76%
4.12%
and non-covered foreclosed real estate
3.18%
4.18%
3.62%
5.00%
5.81%
Non-covered nonperforming assets to total non-covered
assets
2.37%
3.09%
2.78%
3.64%
4.30%
(1) Covered nonperforming assets consist of assets that are included in loss share agreements with the FDIC. On July 1, 2014, approximately $9.7 million
of nonaccrual loans, $2.1 million accruing restructured loans and $3.0 million of foreclosed real estate were transferred from covered to noncovered
status upon a scheduled expiration of a FDIC loss-share agreement.
(2) At December 31, 2015, 2014 and 2013, the contractual balance of the nonaccrual loans covered by the FDIC loss share agreement was $12.3 million,
$16.0 million and $60.4 million, respectively.
83
Table 12a Nonperforming Assets by Geographical Region
($ 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, 2015
Covered
Non-covered
Total
Total Loans
Nonperforming
Loans to Total
Loans
$ 7,793
–
–
–
38
3,435
28
–
–
15,479 23,272
19,694
19,694
14,514
14,514
1,892
1,892
6,730
6,692
3,435
–
2,438
2,410
7,324
7,324
–
–
646,000
744,000
334,000
98,000
268,000
87,000
123,000
194,000
25,000
$ 11,294
68,005
79,299
2,519,000
3.6%
2.6%
4.3%
1.9%
2.5%
3.9%
2.0%
3.8%
0.0%
3.2%
$ 512
–
–
–
–
294
–
–
–
$ 806
1,498 2,010
3,090
917
858
1,059
–
699
1,067
–
9,188
3,090
917
858
1,059
294
699
1,067
–
9,994
(1) The counties comprising each region are as follows:
Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret
Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake
Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly
Charlotte North Carolina Region - Iredell, Cabarrus, Mecklenburg, Rowan
Southern Piedmont North Carolina Region - Anson, Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland
Western North Carolina Region – Buncombe
South Carolina Region - Chesterfield, Dillon, Florence
Virginia Region – Wythe, Washington, Montgomery, Roanoke
84
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
2015
2014
As of December 31,
2013
2012
2011
$ 4,780
3,446
8,533
6,832
8,635
14,064
4,855
14,103
4,443
14,268
18,623
1,038
27,887
696
$ 28,583
24,244
841
40,450
176
40,626
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
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, 2015
Non-covered
Total
Covered
As of December 31, 2014
Covered
Non-covered
Total
$ 22
4,758
4,780
142
8,391
8,533
36
3,410
3,446
362
6,470
6,832
1,741
̶
1,799
̶
$ 1,799
16,882
1,038
26,088
696
26,784
18,623
1,038
27,887
696
28,583
1,748
̶
2,252
29
2,281
22,496
841
38,198
147
38,345
24,244
841
40,450
176
40,626
85
Table 14 Loan Loss and Recovery Experience
($ in thousands)
2015
2014
As of December 31,
2013
2012
2011
Loans outstanding at end of year
$ 2,518,926
2,396,174
2,463,194
2,376,457
2,430,386
Average amount of loans outstanding
$ 2,434,602
2,434,331
2,419,679
2,436,997
2,461,995
Allowance for loan losses, at
beginning of year
Provision (reversal) 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 (reversal) for loan losses as a percent of
$ 40,626
(780)
39,846
48,505
10,195
58,700
46,402
30,616
77,018
41,418
79,672
121,090
49,430
41,301
90,731
(3,039)
(3,616)
(5,145)
(1,117)
(3,103)
(2,411)
(18,431)
934
3,599
678
(5,179)
(4,667)
(5,000)
(2,358)
(6,071)
(10,582)
(28,613)
(25,604)
(4,050)
(4,764)
(15,490)
(12,045)
(1,607)
(4,405)
(1,924)
(23,236)
149
3,363
646
(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)
314
919
492
143
1,390
424
7,168
(11,263)
$ 28,583
100
446
458
5,162
(18,074)
40,626
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
0.46%
1.13%
2.54x
0.74%
1.70%
2.25x
1.18%
1.97%
1.70x
3.06%
1.95%
0.62x
2.00%
1.70%
0.84x
net charge-offs
-6.93%
56.41%
107.38%
106.67%
83.75%
Recoveries of loans previously charged-off as a
percent of loans charged-off
38.89%
22.22%
12.09%
3.35%
5.13%
(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 $30.4 million
after the charge-offs were recorded was classified as “Loans held for sale” on the Company’s consolidated balance sheet at
December 31, 2012.
86
Table 14a - Loan Loss and Recovery Experience – Covered versus Non-covered
($ in thousands)
As of December 31, 2015
Non-covered
Covered
Total
As of December 31, 2014
Non-covered
Covered
Total
Loans outstanding at end of year
$ 102,641
2,416,285
2,518,926
127,594
2,268,580
2,396,174
Average amount of loans outstanding
$ 114,099
2,320,503
2,434,602
159,777
2,274,554
2,434,331
Allowance for loan losses, at beginning
of year
Provision (reversal) for loan losses
Transfer of covered allowance for loan
losses to non-covered status
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) recoveries
Allowance for loan losses, at end of
year
Ratios:
Net charge-offs (recoveries) 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
(recoveries)
Provision (reversal) for loan losses as
a percent of net charge-offs
(recoveries)
Recoveries of loans previously
charged-off as a percent of loans
charged-off
40,626
(780)
4,242
3,108
44,263
7,087
48,505
10,195
$ 2,281
(2,788)
̶
(507)
(130)
(559)
(264)
(63)
(300)
−
(1,316)
103
2,601
399
22
38,345
2,008
̶
̶
40,353
39,846
(2,909)
(3,039)
(3,057)
(3,616)
(4,881)
(5,145)
(1,054)
(1,117)
(2,803)
(2,411)
(17,115)
(3,103)
(2,411)
(18,431)
831
998
279
121
934
3,599
678
143
(1,737)
5,613
(1,359)
(3,715)
(877)
(74)
(921)
(2)
(6,948)
15
2,939
411
2
1,737
̶
53,087
58,700
(3,820)
(5,179)
(2,356)
(6,071)
(3,173)
(4,050)
(1,533)
(1,607)
(3,484)
(1,922)
(16,288)
(4,405)
(1,924)
(23,236)
134
424
235
98
149
3,363
646
100
485
12
3,622
2,306
$ 1,799
905
412
3,546
(13,569)
26,784
1,390
424
7,168
(11,263)
28,583
248
1
3,616
(3,332)
2,281
198
457
1,546
(14,742)
38,345
446
458
5,162
(18,074)
40,626
-2.02%
1.75%
0.58%
0.46%
2.09%
0.65%
0.74%
1.11%
1.13%
1.79%
1.69%
1.70%
-0.78x
1.97x
2.54x
0.68x
2.60x
2.25x
120.90%
14.80%
-6.93%
93.28%
48.07%
56.41%
275.23%
20.72%
38.89%
52.04%
9.49%
22.22%
87
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
2015
Year Ended December 31,
2014
2013
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$ 568,329
582,407
184,821
410,692
322,205
2,068,454
618,927
$2,687,381
0.06%
0.13%
0.05%
0.70%
0.39%
0.26%
−
0.20%
$ 535,738
552,940
176,362
542,303
387,607
2,194,950
528,808
$2,723,758
0.06%
0.11%
0.05%
0.81%
0.43%
0.32%
−
0.26%
$ 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%
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, 2015
Over 6 to 12
Months
Over 12
Months
Total
Time deposits of $100,000 or more
$ 108,375
79,089
139,581
76,500
403,545
88
Table 17 Interest Rate Sensitivity Analysis
Percent of total earning assets
Cumulative percent of total earning assets
32.84%
32.84%
($ in thousands)
Earning assets:
Loans (1)
Securities available for sale (2)
Securities held to maturity (2)
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, 2015
Total Within
12 Months
Over 3 to 12
Months
Over 12
Months
3 Months
or Less
Total
$ 748,383
29,447
7,996
218,306
$ 1,004,132
$ 626,878
639,189
186,616
108,375
95,432
126,394
$ 1,782,884
171,485
15,326
19,002
─
205,813
6.73%
39.57%
─
─
─
218,670
149,687
20,000
388,357
919,868
44,773
26,998
218,036
1,209,945
1,599,058
120,841
127,612
─
1,847,511
2,518,926
165,614
154,610
218,036
3,057,456
39.57%
39.57%
60.43%
100.00%
100.00%
100.00%
626,878
639,189
186,616
327,045
245,119
146,394
2,171,241
─
─
─
76,500
50,900
40,000
167,400
626,878
639,189
186,616
403,545
296,019
186,394
2,338,641
76.24%
16.61%
92.84%
7.16%
100.00%
76.24%
92.84%
92.84%
100.00%
100.00%
$ (778,752)
(778,752)
(182,544)
(961,296)
(961,296)
(961,296)
1,680,111
718,815
718,815
718,815
(25.47%)
(31.44%)
(31.44%)
23.51%
23.51%
56.32%
55.73%
55.73%
130.74%
130.74%
(1) The three months or less category for loans includes $442,860 in adjustable rate loans that have reached their contractual rate floors.
Thus, the interest rates on these loans will not decrease any further. For the majority of these loans, it will take an increase in prime
rate of at least 200 basis points before the loans will reprice higher.
(2) Securities available for sale include government-sponsored enterprise securities, mortgage-backed securities, corporate bonds, and
equity securities. Securities held to maturity include mortgage-backed securities and state and local government securities. For fixed
rate mortgage-backed securities, the principal is assumed to reprice equally over the average life of the underlying security. All other
fixed rate securities are assumed to reprice based on maturity date or call date. Variable rate securities are included in the period in
which they are subject to reprice.
89
Table 18 Contractual Obligations and Other Commercial Commitments
Contractual
Obligations
As of December 31, 2015
Borrowings
Operating leases
Total contractual cash obligations,
excluding deposits
Deposits
Total contractual cash obligations,
Payments Due by Period ($ in thousands)
Total
$ 186,394
4,667
On Demand or
Less
than 1 Year
100,000
1,122
1-3 Years
40,000
1,846
4-5 Years
─
1,022
After 5
Years
46,394
677
191,061
101,122
41,846
1,022
47,071
2,811,285
2,681,283
90,747
34,920
4,335
including deposits
$ 3,002,346
2,782,405
132,593
35,942
51,406
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial
Commitments
As of December 31, 2015
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
Total
Amounts
Committed
$ 64,039
460,308
13,057
$ 537,404
Less
than 1 Year
32,020
187,044
12,988
232,052
1-3 Years
4-5 Years
32,019
43,690
38
75,747
─
46,011
31
46,042
After 5
Years
─
183,563
─
183,563
90
Table 19 Market Risk Sensitive Instruments
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2015 Occurring in Indicated Year
($ in thousands)
2016
2017
2018
2019
2020
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 – fixed
Borrowings – adjustable
Total
$ 213,426
557
4,323
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
213,426
557
0.50%
0.50%
$ 213,426
557
4,323
3.80%
4,323
52,457
55,163
58,648
53,828
171,636 145,922 251,086 227,209 211,978
48,541
64,701
179,186
$ 624,291 267,564 369,615 362,882 319,167
66,743
68,930
69,185
32,274
638,631
396,298
1,067,203
321,300
1,646,462
824,654
3,010,722
2.72%
322,617
4.64%
1,647,154
817,678
4.34%
4.06% $ 3,005,755
$ 626,878
639,189
186,616
569,562
100,000
−
$ 2,122,245
−
−
−
65,143
20,000
–
85,143
−
−
−
25,604
20,000
–
45,604
−
−
−
10,840
−
–
10,840
−
−
−
24,080
−
–
24,080
−
−
−
4,335
−
46,394
50,729
626,878
639,189
186,616
699,564
140,000
46,394
2,338,641
$ 626,878
0.06%
639,189
0.16%
186,616
0.05%
698,107
0.53%
139,980
0.72%
38,489
2.40%
0.31% $ 2,329,259
(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, 2015 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
2015
For the Year Ended December 31,
2014
2013
Return on average assets
Return on average common equity
Dividend payout ratio – common shares
Average shareholders’ equity to average assets
0.82%
8.04%
23.88%
11.65%
0.75%
7.73%
26.23%
11.90%
0.62%
6.78%
31.68%
11.31%
91
Table 21 Risk-Based and Leverage Capital Ratios
($ in thousands)
Risk-Based and Leverage Capital
Common Equity Tier I capital:
Shareholders’ equity
Preferred stock
Intangible assets, net of deferred tax liability
Accumulated other comprehensive income
adjustments
Total Common Equity Tier I capital
Tier I capital:
Preferred stock
Trust preferred securities eligible for Tier I
capital treatment
Total Tier I leverage capital
Tier II capital:
Allowable allowance for loan losses
Other Tier II capital
Tier II capital additions
Total capital
2015
(under Basel III)
As of December 31,
2014
(pre-Basel III)
2013
(pre-Basel III)
$ 342,190
(7,287)
(55,687)
387,699
(70,787)
(67,893)
371,922
(70,787)
(68,669)
3,550
282,766
7,287
45,000
335,053
578
249,597
70,787
45,000
365,384
(1,900)
230,566
70,787
45,000
346,353
28,583
489
29,072
$ 364,125
28,096
--
28,096
393,480
28,127
--
28,127
374,480
Total risk weighted assets
$ 2,519,193
2,235,143
2,229,776
Adjusted fourth quarter average assets
3,227,166
3,146,409
3,099,007
Risk-based capital ratios:
Common equity Tier I capital to
Tier I risk adjusted assets
Minimum required Common equity Tier I capital
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
11.22%
4.50%
13.30%
6.00%
14.45%
8.00%
10.38%
4.00%
11.17%
n/a
16.35%
4.00%
17.60%
8.00%
11.61%
4.00%
10.34%
n/a
15.53%
4.00%
16.79%
8.00%
11.18%
4.00%
n/a – not applicable. Common Equity Tier I capital and related ratios were not required until Basel III became effective on January 1, 2015.
92
Table 22 Quarterly Financial Summary (Unaudited)
2015
2014
($ 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 (reversal) for loan losses
Net interest income after provision
for losses
Noninterest income
Noninterest expense
Income before income taxes
Income taxes
Net income
Preferred stock dividends
Net income available to common
shareholders
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$ 32,230
1,754
30,476
423
30,053
(43)
30,096
5,725
25,503
10,318
3,521
6,797
(37)
32,549
1,744
30,805
419
30,386
(1,414)
31,800
3,506
24,614
10,692
3,687
7,005
(137)
31,662
1,655
30,007
402
29,605
841
28,764
5,004
24,300
9,468
3,224
6,244
(212)
31,848
1,755
33,203
1,904
30,093
390
29,703
(164)
29,867
4,529
23,714
10,682
3,694
6,988
(217)
31,299
376
30,923
1,476
29,447
4,492
22,989
10,950
3,855
7,095
(217)
33,752
2,031
31,721
378
31,343
1,485
29,858
4,608
25,931
8,535
2,956
5,579
(217)
36,330
2,147
34,183
375
33,808
3,659
30,149
4,970
24,780
10,339
3,693
6,646
(217)
38,049
2,141
35,908
373
35,535
3,575
31,960
298
23,551
8,707
3,031
5,676
(217)
6,760
6,868
6,032
6,771
6,878
5,362
6,429
5,459
Per Common Share Data
Earnings per common share – basic
Earnings per common share – diluted
Cash dividends declared
Market Price
High
Low
Close
Stated book value - common
Tangible book value - common
$ 0.34
0.33
0.08
19.92
16.01
18.74
16.96
13.56
0.35
0.34
0.08
17.86
16.01
17.00
16.80
13.40
0.30
0.30
0.08
17.85
15.18
16.68
16.51
13.10
0.34
0.33
0.08
0.35
0.34
0.08
18.64
15.00
17.56
16.34
12.90
18.86
15.55
18.47
16.08
12.63
0.27
0.27
0.08
18.82
15.87
16.02
15.94
12.48
0.33
0.32
0.08
19.25
16.48
18.35
15.75
12.28
0.28
0.27
0.08
19.65
15.91
19.00
15.50
12.02
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
$ 3,282,853
2,504,022
2,982,356
2,732,231
2,258,911
348,777
3,244,515
2,453,580
2,951,638
2,680,671
2,223,025
369,499
3,199,270
2,389,735
2,901,770
2,667,649
2,180,746
394,699
3,194,570
2,391,071
2,910,732
2,688,973
2,210,302
392,173
3,214,302
2,411,117
2,920,295
2,691,076
2,235,758
389,709
3,226,960
2,428,475
2,924,705
2,713,296
2,292,656
385,551
3,259,550
2,438,364
2,946,586
2,751,466
2,354,768
380,542
3,178,848
2,459,368
2,836,806
2,739,194
2,294,138
376,418
0.82%
7.96%
10.18%
0.84%
8.23%
11.34%
0.76%
7.42%
11.38%
0.86%
8.54%
12.21%
0.85%
8.56%
12.05%
0.66%
6.76%
12.04%
0.79%
8.32%
11.67%
0.70%
7.24%
11.35%
8.35%
9.48%
9.47%
10.33%
10.15%
10.13%
9.78%
9.48%
8.13%
91.65%
8.27%
91.53%
8.24%
89.58%
8.08%
88.92%
7.90%
89.60%
7.86%
89.50%
7.57%
88.62%
7.30%
89.78%
132.03%
4.05%
1.13%
132.78%
4.14%
1.21%
133.06%
4.15%
1.33%
131.69%
4.19%
1.50%
130.62%
4.25%
1.70%
127.57%
4.30%
1.82%
125.13%
4.65%
1.88%
123.65%
5.13%
1.97%
total loans
3.26%
Nonperforming loans as a percent of
3.01%
total loans – non-covered
3.15%
2.81%
3.63%
3.92%
4.25%
4.20%
4.27%
4.49%
3.31%
3.58%
3.77%
3.71%
3.31%
3.12%
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
2.66%
2.80%
3.09%
3.26%
3.54%
3.66%
3.77%
4.26%
2.37%
2.56%
2.78%
2.92%
3.09%
3.17%
2.73%
2.65%
0.23%
0.10%
0.80%
0.76%
0.82%
0.51%
0.99%
0.65%
0.33%
0.38%
0.81%
0.84%
0.78%
0.60%
0.69%
0.52%
93
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2015 and 2014
($ 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 $157,146 in 2015 and $182,411 in 2014)
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
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: None in 2015 and 63,500 in 2014
Series C, convertible, issued & outstanding: 728,706 in 2015 and 2014
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 19,747,509 shares in 2015 and 19,709,881 shares in 2014
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
94
2015
2014
$ 53,285
213,426
557
267,268
81,068
171,248
768
253,084
165,614
154,610
4,323
2,416,285
102,641
2,518,926
(26,784)
(1,799)
(28,583)
2,490,343
74,559
9,166
8,439
65,835
1,336
9,188
806
72,086
38,492
$ 3,362,065
$ 659,038
626,878
639,189
186,616
403,545
296,019
2,811,285
186,394
585
21,611
3,019,875
158,018
178,687
6,019
2,268,580
127,594
2,396,174
(38,345)
(2,281)
(40,626)
2,355,548
75,113
8,920
22,569
65,835
2,058
9,771
2,350
55,421
24,990
3,218,383
560,230
583,903
551,002
180,317
470,066
350,388
2,695,906
116,394
686
17,698
2,830,684
─
7,287
63,500
7,287
133,393
205,060
(3,550)
342,190
$ 3,362,065
132,532
184,958
(578)
387,699
3,218,383
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2015, 2014 and 2013
($ 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
Borrowings
Total interest expense
Net interest income
Provision for loan losses – non-covered
Provision (reversal) for loan losses – covered
Total provision (reversal) 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
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 noninterest income
Noninterest Expenses
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Intangibles amortization
Other operating expenses
Total noninterest expenses
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Earnings per common share: Basic
Earnings per common share: Diluted
Dividends declared per common share
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
95
2015
2014
2013
$ 117,872
133,641
141,616
6,296
1,829
658
126,655
1,192
2,856
1,271
1,589
6,908
119,747
2,008
(2,788)
(780)
120,527
11,648
10,906
2,532
2,580
1,665
(2,504)
1,018
(8,615)
(1)
(465)
18,764
47,660
9,134
56,794
7,358
3,749
722
29,508
98,131
41,160
14,126
3,461
1,881
849
139,832
1,040
4,373
1,659
1,151
8,223
131,609
7,087
3,108
10,195
121,414
13,706
10,019
2,726
2,733
1,311
(1,924)
(1,919)
(12,842)
786
(228)
14,368
46,071
9,086
55,157
7,362
3,931
777
30,024
97,251
38,531
13,535
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
27,034
24,996
20,699
(603)
(868)
(895)
$ 26,431
24,128
19,804
$ 1.34
1.30
1.22
1.19
1.01
0.98
$ 0.32
0.32
0.32
19,767,470
20,499,727
19,699,801
20,434,007
19,675,597
20,404,303
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2015, 2014 and 2013
($ in thousands)
2015
2014
2013
Net income
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) losses
Tax expense (benefit)
Postretirement plans:
Net gain (loss) arising during period
Tax (expense) benefit
Amortization of unrecognized net actuarial (gain) loss
Tax expense (benefit)
Other comprehensive income (loss)
$ 27,034
24,996
20,699
(473)
184
1
─
(4,321)
1,685
(79)
31
(2,972)
2,115
(825)
(786)
307
(5,171)
2,017
(221)
86
(2,478)
(4,779)
1,865
(532)
207
8,765
(3,419)
(51)
20
2,076
Comprehensive income
$ 24,062
22,518
22,775
See accompanying notes to consolidated financial statements.
96
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2015, 2014 and 2013
(In thousands)
Preferred
Stock
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Share-
holders’
Equity
Balances, January 1, 2013
$ 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
Net income
Stock option exercises
Cash dividends declared ($0.32 per
share)
Preferred dividends
Stock-based compensation
Other comprehensive income (loss)
5
70
25
363
24,996
(6,306)
(868)
20,699
(6,297)
(895)
222
2,076
371,922
24,996
70
(6,306)
(868)
363
(2,478)
2,076
1,900
(2,478)
Balances, December 31, 2014
70,787
19,710
132,532
184,958
(578)
387,699
(63,500)
Net income
Preferred stock redeemed (Series B)
Stock option exercises
Stock withheld for payment of taxes
Cash dividends declared ($0.32 per
share)
Preferred dividends
Stock-based compensation
Other comprehensive income (loss)
27,034
(6,329)
(603)
7
(3)
112
(54)
34
803
(2,972)
27,034
(63,500)
112
(54)
(6,329)
(603)
803
(2,972)
Balances, December 31, 2015
$ 7,287
19,748 $ 133,393
205,060
(3,550)
342,190
See accompanying notes to consolidated financial statements.
97
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2015, 2014 and 2013
($ in thousands)
Cash Flows From Operating Activities
Net income
Reconciliation of net income to net cash provided by operating activities:
Provision (reversal) for loan losses
Net security premium amortization
Purchase accounting accretion and amortization, net
Foreclosed property (gains) losses and write-downs, net
Loss (gain) on securities available for sale
Other losses
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 (increase) 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
Purchases of Federal Reserve and Federal Home Loan Bank stock, net
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 sales of premises and equipment
Proceeds from loans held for sale
Net cash received in acquisition
Net cash provided (used) by investing activities
Cash Flows From Financing Activities
Net increase (decrease) in deposits
Net increase in borrowings
Cash dividends paid – common stock
Cash dividends paid – preferred stock
Redemption of preferred stock
Proceeds from stock option exercises
Stock withheld for payment of taxes
Net cash provided (used) by financing activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
2015
2014
2013
$ 27,034
24,996
20,699
(780)
3,247
2,706
1,486
1
465
73
4,494
710
722
(97,118)
98,783
(246)
(3,904)
(101)
(222)
37,350
(95,822)
(857)
—
86,238
23,203
(9,877)
(15,000)
(138,346)
6,673
9,650
(5,481)
1,621
—
—
(137,998)
115,379
70,000
(6,309)
(796)
(63,500)
112
(54)
114,832
14,184
253,084
10,195
1,934
(7,589)
3,843
(786)
228
(17)
4,618
270
777
(101,493)
101,047
729
6,586
(193)
2,675
47,820
(66,263)
(125,377)
47,473
30,332
453
(2,122)
(10,000)
52,157
17,724
33,262
(4,751)
1,309
—
—
(25,803)
(55,106)
70,000
(6,303)
(868)
—
70
—
7,793
29,810
223,274
30,616
2,667
(15,478)
(1,700)
(532)
148
396
4,623
222
860
(103,877)
106,787
552
22,199
(447)
4,145
71,880
(65,733)
—
12,908
38,881
1,837
1,040
(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
Cash and Cash Equivalents, End of Year
$ 267,268
253,084
223,274
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
Unrealized gain (loss) on securities available for sale, net of taxes
$ 7,009
13,815
8,416
5,096
11,405
1,082
9,009
(288)
12,717
811
22,037
(3,240)
98
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2015
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.
99
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
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 when the loan has
provided 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. For a nonaccrual loan that has been restructured, if the borrower has six months of
satisfactory performance under the restructured terms and it is reasonably assured that the borrower will
continue to be able to comply with the restructured terms, the loan may be returned to accruing status. The
nonaccrual policy discussed above applies to all loan classifications.
100
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. A loan is
specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation
threshold (which varies based on credit quality, accruing status, troubled debt restructured status, and type of
collateral) and the loan is determined to be impaired. 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 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 − 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, 2015 or 2014.
(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. Recoveries on loans previously charged-off are added back to
the allowance. 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 individually evaluated impaired loans,
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
necessary if economic and other conditions differ substantially from the assumptions used.
101
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.
(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 foreclosed 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) the receivable (payable) related to
actual loss claims (recoveries) that have been submitted to the FDIC for reimbursement (repayment) and 2) the
receivable associated with the Company’s estimated amount of loan and foreclosed real estate losses covered
by the agreements multiplied by the FDIC reimbursement percentage.
(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.
(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.”
102
(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, 2015 and 2014, the Company’s investments in limited partnerships, LLCs and other privately
held companies totaled $2.3 million and $2.2 million, respectively, and were included in other assets.
(n) Stock Option Plan − At December 31, 2015, 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 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.
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 includes the case
when a net loss is reported, the potentially dilutive common stock issuance is disregarded.
103
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)
2015
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2014
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2013
Shares
(Denom-
inator)
Per
Share
Amount
For the Years Ended December 31,
Basic EPS
Net income available
to common
shareholders
Effect of dilutive
securities
Diluted EPS per
common share
$ 26,431
19,767,470
$ 1.34
$ 24,128
19,699,801
$ 1.22
$ 19,804
19,675,597
$ 1.01
233
732,257
233
734,206
233
728,706
$ 26,664
20,499,727
$ 1.30
$ 24,361
20,434,007
$ 1.19
$ 20,037
20,404,303
$ 0.98
For the years ended December 31, 2015, 2014 and 2013, there were 50,000 options, 93,000 options and
388,813 options, respectively, 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 both years ended December 31, 2014 and 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 had concluded were not probable to vest, and ultimately did not vest during 2015.
(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
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 or the present value of expected cash flows.
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.
104
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 the discounted value of the contractual cash flows. The
discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar
maturities.
Commitments to Extend Credit and Standby Letters of Credit − At December 31, 2015 and 2014, 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.
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:
105
($ 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,
2015
$ (1,163)
454
(709)
December 31,
2014
(691)
270
(421)
December 31,
2013
(2,021)
789
(1,232)
Additional pension asset (liability)
Deferred tax asset (liability)
Net additional pension asset (liability)
(4,657)
1,816
(2,841)
(257)
100
(157)
5,135
(2,003)
3,132
Total accumulated other comprehensive income (loss)
$ (3,550)
(578)
1,900
The following table discloses the changes in accumulated other comprehensive income (loss) for the year ended
December 31, 2015 (all amounts are net of tax).
($ in thousands)
Beginning balance at January 1, 2015
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
$ (421)
(289)
1
(288)
Additional
Pension Asset
(Liability)
(157)
(2,636)
(48)
(2,684)
Total
(578)
(2,925)
(47)
(2,972)
Ending balance at December 31, 2015
$ (709)
(2,841)
(3,550)
The following table discloses the changes in accumulated other comprehensive income (loss) for the year ended
December 31, 2014 (all amounts are net of tax).
($ in thousands)
Beginning balance at January 1, 2014
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
$ (1,232)
1,290
(479)
811
Additional
Pension Asset
(Liability)
3,132
(3,154)
(135)
(3,289)
Total
1,900
(1,864)
(614)
(2,478)
Ending balance at December 31, 2014
$ (421)
(157)
(578)
(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 2015
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 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
106
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 should be accounted for as an equity method investment or a cost method investment
in accordance with existing accounting guidance. The amendments were effective for the Company beginning
January 1, 2015 and did not have a material effect on the Company’s financial statements.
In January 2014, the FASB amended the Receivables topic of the Accounting Standards Codification. The
amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a
collateralized consumer mortgage loan to other real estate owned (“OREO”). In addition, the amendments
require a creditor to reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the
real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender
to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments were
effective for the Company beginning January 1, 2015. In implementing this guidance, assets that are reclassified
from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets
reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the
fair value of the real estate less costs to sell at the date of adoption. The Company can apply these amendments
either prospectively or using a modified retrospective approach. The adoption of these amendments did not
have a material effect on the Company’s financial statements.
In May 2014 and August 2015, the FASB issued guidance to change the recognition of revenue from contracts
with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the
transfer of goods and services to customers in an amount equal to the consideration the entity receives or
expects to receive. The guidance will be effective for the Company for reporting periods beginning after
December 15, 2017. The Company can apply the guidance using either the full retrospective approach or a
modified retrospective approach. The Company does not expect this guidance to have a material effect on its
financial statements.
In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for
certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity
transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates
accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements
related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically,
repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured
borrowings. The amendments were effective for the Company beginning January 1, 2015 and did not have a
material effect on its financial statements.
In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock
compensation should be treated as a performance condition and should not be reflected in the grant date fair
value of the stock award. The amendments will be effective for the Company for fiscal years that begin after
December 15, 2015. The Company will apply the guidance to all stock awards granted or modified after the
amendments are effective. The Company does not expect this guidance to have a material effect on its financial
statements.
In August 2014, the FASB amended guidance to eliminate the diversity in the classification of foreclosed
mortgage loans when the loan is guaranteed under certain government-sponsored loan guarantee programs.
The amendments were effective for the Company beginning on January 1, 2015 and did not have material effect
on its financial statements.
In August 2014, the FASB issued guidance that is intended to define management’s responsibility to evaluate
whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide
107
related footnote disclosures. In connection with preparing financial statements, management will need to
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about
the organization’s ability to continue as a going concern within one year after the date that the financial
statements are issued. The amendments will be effective for the Company for the annual period ending after
December 15, 2016, and for annual and interim periods thereafter. The Company does not expect these
amendments to have a material effect on its financial statements.
In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items from U.S. GAAP.
Existing U.S. GAAP required that an entity separately classify, present, and disclose extraordinary events and
transactions. The amendments will eliminate the requirements for reporting entities to consider whether an
underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items
that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are
both unusual in nature and infrequently occurring. The amendments are effective for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either
prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is
permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company
does not expect these amendments to have a material effect on its financial statements.
In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly
changes the consolidation analysis required under U.S. GAAP. The amendments are expected to result in the
deconsolidation of many entities. The amendments will be effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an
interim period), provided that the guidance is applied as of the beginning of the annual period containing the
adoption date. The Company does not expect these amendments to have a material effect on its financial
statements.
In April 2015, the FASB issued guidance that will require debt issuance costs related to a recognized debt liability
to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This
update affects disclosures related to debt issuance costs but does not affect existing recognition and
measurement guidance for these items. The amendments will be effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does
not expect these amendments to have a material effect on its financial statements.
In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to
measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal
year-end. The amendments will be effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2015, with early adoption permitted. The Company does not expect these
amendments to have a material effect on its financial statements.
In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification, correct unintended
application of guidance, and make minor improvements that are not expected to have a significant effect on
current accounting practice or create a significant administrative cost to most entities. The amendments were
effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments
that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period.
The Company does not expect these amendments to have a material effect on its financial statements.
In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to
clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-
of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these
amendments to have a material effect on its financial statements.
108
In January 2016, the FASB issued guidance that will require entities to measure equity investments that do not
result in consolidation and are not accounted for under the equity method at fair value. Any changes in fair
value will be recognized in net income unless the investments qualify for a new practicability exception. This
guidance also requires entities to recognize changes in instrument-specific credit risk related to financial
liabilities measured under the fair value option in other comprehensive income. No changes were made to the
guidance for classifying and measuring investments in debt securities and loans. This guidance is effective for
annual and interim periods beginning after December 15, 2017. Management does not expect the adoption of
this guidance will have a material effect on its financial statements.
In February 2016, the FASB issued new guidance on accounting for leases, which generally requires all leases to
be recognized in the statement of financial position. The provisions of this guidance are effective for reporting
periods beginning after December 15, 2018; early adoption is permitted. These provisions are to be applied
using a modified retrospective approach. We are currently evaluating the effect that this ASU will have on our
consolidated financial statements. The Company does not expect this guidance 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 acquisition described below in 2013. The Company did not complete any
acquisitions in 2014 or 2015. The results of each acquired company/branch are included in the Company’s
results beginning on its respective acquisition date.
(1) 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 $586,000, which is the amount of the identifiable intangible asset associated with the fair value
of the core deposit base. The intangible asset is being amortized as expense on a straight-line basis over a seven
year period. The operations of the two branches are included in the accompanying Consolidated Statements of
Income beginning on the acquisition date of March 22, 2013. Historical pro forma information is not presented
due to the immateriality of the transaction.
109
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2015 and 2014 are
summarized as follows:
($ 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:
Mortgage-backed securities
State and local governments
Total held to maturity
2015
2014
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
$ 19,000
122,474
25,216
88
$ 166,778
18,972
121,553
24,946
143
165,614
1
348
̶
64
413
(29)
(1,269)
(270)
(9)
(1,577)
27,546
130,073
1,000
89
158,708
27,521
129,510
865
122
158,018
$ 102,509
52,101
$ 154,610
101,767
55,379
157,146
̶
3,284
3,284
(742)
(6)
(748)
124,924
53,763
178,687
124,861
57,550
182,411
33
751
̶
46
830
45
3,787
3,832
(58)
(1,314)
(135)
(13)
(1,520)
(108)
̶
(108)
Included in mortgage-backed securities at December 31, 2015 were collateralized mortgage obligations with an
amortized cost of $34,500 and a fair value of $34,800. Included in mortgage-backed securities at December 31,
2014 were collateralized mortgage obligations with an amortized cost of $108,000 and a fair value of $111,000.
All of the Company’s mortgage-backed securities, including the collateralized mortgage obligations, were issued
by government-sponsored corporations.
The following table presents information regarding securities with unrealized losses at December 31, 2015:
($ 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
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
State and local governments
Total temporarily impaired securities
Fair Value
$ 5,993
150,853
24,006
−
840
$ 181,692
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
7
1,148
210
−
6
1,371
2,978
27,460
940
17
–
31,395
22
863
60
9
–
954
8,971
178,313
24,946
17
840
213,087
29
2,011
270
9
6
2,325
The following table presents information regarding securities with unrealized losses at December 31, 2014:
($ 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
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Equity securities
State and local governments
Total temporarily impaired securities
Fair Value
$ 5,489
69,985
−
−
−
$ 75,474
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
11
318
−
−
−
329
2,953
33,557
865
17
–
37,392
47
1,104
135
13
–
1,299
8,442
103,542
865
17
–
112,866
58
1,422
135
13
–
1,628
110
In the above tables, all of the non-equity securities that were in an unrealized loss position at December 31,
2015 and 2014 are bonds that the Company has determined are in a loss position due primarily to interest rate
factors and not credit quality concerns. 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.
The Company has concluded that each of the equity securities in an unrealized loss position at December 31,
2015 and 2014 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 book values and approximate fair values of investment securities at December 31, 2015, 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
$ −
19,000
20,216
5,000
122,474
166,690
88
$ 166,778
−
18,972
20,026
4,920
121,553
165,471
143
165,614
$ 835
12,549
37,286
1,431
102,509
154,610
̶
$ 154,610
839
13,190
39,919
1,431
101,767
157,146
̶
157,146
At December 31, 2015 and 2014, investment securities with carrying values of $141,379,000 and $100,113,000,
respectively, were pledged as collateral for public deposits.
In 2015, the Company recorded $1,000 in securities losses associated with write-downs and did not sell any
securities. In 2014 and 2013, the Company initiated security sales totaling $47,473,000 and $12,908,000,
respectively, which resulted in net gains of $786,000 and $525,000 in 2014 and 2013, respectively.
The aggregate carrying amount of cost-method investments was $15,893,000 and $6,016,000 at December 31,
2015 and 2014, respectively, which is recorded within the line item “other assets” on the Company’s
Consolidated Balance Sheets. These investments are comprised of Federal Home Loan Bank (“FHLB”) stock and
Federal Reserve Bank of Richmond (“FRB”) stock. The FHLB stock had a cost and fair value of $8,846,000 and
$6,016,000 at December 31, 2015 and 2014, respectively, and serves as part of the collateral for the Company’s
line of credit with the FHLB and is also a requirement for membership in the FHLB system. The FRB stock had a
cost and fair value of $7,047,000 at December 31, 2015. The Company was required to purchase this stock
when it became a member of the Federal Reserve System in the second quarter of 2015. Periodically, both the
FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or
the redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either
period end.
111
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 filed with the SEC 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.”
On July 1, 2014, one of the Company’s loss share agreements with the FDIC expired. The agreement that
expired related to the non-single family assets of Cooperative Bank, a failed bank acquisition from June 2009.
Accordingly, the remaining balances associated with these loans and foreclosed real estate were transferred
from the covered portfolio to the non-covered portfolio on July 1, 2014. The Company bears all future losses on
this portfolio of loans and foreclosed real estate. Immediately prior to the transfer to non-covered status, the
loans in this portfolio had a carrying value of $39.7 million and the foreclosed real estate in this portfolio had a
carrying value of $3.0 million. Of the $39.7 million in loans that lost loss share protection, approximately $9.7
million were on nonaccrual status and $2.1 million were classified as accruing troubled debt restructurings as of
July 1, 2014. Additionally, approximately $1.7 million in allowance for loan losses associated with this portfolio
of loans was transferred to the allowance for loan losses for non-covered loans on July 1, 2014.
The following is a summary of the major categories of total loans outstanding:
($ 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, 2015
December 31, 2014
Amount
Percentage
Amount
Percentage
$ 202,671
8%
$ 160,878
308,969
12%
288,148
family) first mortgages
768,559
31%
789,871
Real estate – mortgage – home equity
loans / lines of credit
232,601
9%
223,500
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs
Total loans
957,587
47,666
2,518,053
873
$ 2,518,926
38%
2%
100%
882,127
50,704
2,395,228
946
$ 2,396,174
7%
12%
33%
9%
37%
2%
100%
Loans in the amount of $2.0 billion and $1.9 billion were pledged as collateral for certain borrowings as of
December 31, 2015 and December 31, 2014, respectively (see Note 10).
The loans above also include loans to executive officers and directors serving the Company at December 31,
2015 and to their associates, totaling approximately $3.4 million and $3.8 million at December 31, 2015 and
2014, respectively. During 2015 additions to such loans were approximately $0.9 million and repayments
totaled approximately $1.3 million. These loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with other non-related
borrowers. Management does not believe these loans involve more than the normal risk of collectability or
present other unfavorable features.
112
The following is a summary of the major categories of non-covered loans outstanding:
($ in thousands)
Non-covered loans:
December 31, 2015
December 31, 2014
Amount
Percentage
Amount
Percentage
Commercial, financial, and agricultural
Real estate – construction, land
development & other land loans
Real estate – mortgage – residential (1-4
$ 201,798
8%
$ 159,195
305,228
13%
282,604
family) first mortgages
692,902
29%
700,101
Real estate – mortgage – home equity
loans / lines of credit
221,995
9%
210,697
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs
Total non-covered loans
945,823
47,666
2,415,412
873
$ 2,416,285
39%
2%
100%
864,333
50,704
2,267,634
946
$ 2,268,580
7%
13%
31%
9%
38%
2%
100%
The carrying amount of the covered loans at December 31, 2015 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
Total
Impaired
Purchased
Loans –
Carrying
Value
$ −
277
102
7
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
−
365
633
14
873
3,464
75,555
10,599
10,761
101,252
886
873
886
3,457
3,741
3,822
88,434
75,657
89,067
12,099
10,606
12,113
11,458
116,334
11,764
102,641
14,594
120,482
1,003
$ 1,389
3,136
4,148
The carrying amount of the covered loans at December 31, 2014 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
Total
Impaired
Purchased
Loans –
Carrying
Value
$ 66
309
362
12
1,201
$ 1,950
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
1,617
5,235
1,661
1,683
1,784
6,471
5,544
7,005
89,408
104,678
89,770
105,976
12,791
15,099
12,803
15,118
16,593
125,644
17,789
145,698
17,794
127,594
20,998
150,881
123
534
1,298
19
3,209
5,183
113
The following table presents information regarding covered purchased nonimpaired loans since December 31,
2013. 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, 2013
Principal repayments
Transfers to foreclosed real estate
Transfers to non-covered loans due to expiration of loss-share agreement
Net loan (charge-offs) / recoveries
Accretion of loan discount
Carrying amount of nonimpaired covered loans at December 31, 2014
Principal repayments
Transfers to foreclosed real estate
Net loan (charge-offs) / recoveries
Accretion of loan discount
Carrying amount of nonimpaired covered loans at December 31, 2015
$ 207,167
(50,183)
(5,061)
(38,987)
(3,301)
16,009
125,644
(30,238)
(1,211)
2,306
4,751
$ 101,252
As reflected in the table above, the Company accreted $4,751,000 and $16,009,000 of the loan discount on
purchased nonimpaired loans into interest income during 2015 and 2014, respectively. As of December 31, 2015,
there was remaining loan discount of $13,086,000 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
covered lives of the respective loans. In such circumstances, a corresponding entry to reduce the indemnification
asset will be recorded amounting to approximately 80% of the loan discount accretion, which reduces
noninterest income. At December 31, 2015, the Company also had $2,174,000 of loan discount related to
purchased nonaccruing loans. It is not expected that a significant amount of this discount will be accreted, as it
represents estimated losses on these loans.
The following table presents information regarding all purchased impaired loans since December 31, 2013, the
majority of which are covered loans. The Company has applied the cost recovery method to all purchased
impaired loans at their respective acquisition dates due to the uncertainty as to the timing of expected cash
flows, as reflected in the following table.
($ in thousands)
Purchased Impaired Loans
Balance at December 31, 2013
Change due to payments received
Change due to loan charge-off
Other
Balance at December 31, 2014
Change due to payments received
Transfer to foreclosed real estate
Other
Balance at December 31, 2015
Fair Market
Value
Adjustment –
Write Down
(Nonaccretable
Difference)
3,121
227
29
(115)
3,262
(102)
(336)
(3)
2,821
Contractual
Principal
Receivable
$ 6,263
(599)
(2)
197
5,859
(634)
(431)
(3)
$ 4,791
Carrying
Amount
3,142
(826)
(31)
312
2,597
(532)
(95)
−
1,970
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 2015 and 2014, the Company received $436,000 and
$179,000, respectively, in payments that exceeded the initial carrying amount of the purchased impaired loans,
which is included in interest income.
114
Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and
still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are
summarized as follows:
ASSET QUALITY DATA ($ in thousands)
Non-covered nonperforming assets
Nonaccrual loans
Restructured loans – accruing
Accruing loans > 90 days past due
Total non-covered nonperforming loans
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,
2015
December 31,
2014
$ 39,994
28,011
−
68,005
9,188
$ 77,193
$ 7,816
3,478
−
11,294
806
$ 12,100
50,066
35,493
−
85,559
9,771
95,330
10,508
5,823
−
16,331
2,350
18,681
Total nonperforming assets
$ 89,293
114,011
_________________________________________________________________________________________________________
(1) At December 31, 2015 and December 31, 2014, the contractual balance of the nonaccrual loans covered by FDIC loss share agreements was $12.3
million and $16.0 million, respectively.
At December 31, 2015 and 2014, the Company had $2.5 million and $6.1 million in residential mortgage loans in
process of foreclosure, respectively.
If the nonaccrual and restructured loans as of December 31, 2015, 2014 and 2013 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 $3,213,000, $4,115,000, and
$5,262,000 for nonaccrual loans and $2,044,000, $3,045,000, and $2,674,000 for restructured loans would have
been recorded for 2015, 2014, and 2013, respectively. Interest income on such loans that was actually collected
and included in net income in 2015, 2014 and 2013 amounted to approximately $575,000, $1,176,000, and
$1,414,000 for nonaccrual loans (prior to their being placed on nonaccrual status), and $1,392,000, $2,003,000,
and $1,681,000 for restructured loans, respectively. At December 31, 2015 and 2014, we had no commitments
to lend additional funds to debtors whose loans were nonperforming.
The remaining tables in this note present information derived from the Company’s allowance for loan loss
model. Relevant accounting guidance requires certain disclosures to be disaggregated based on how the
Company develops its allowance for loan losses and manages its credit exposure. This model combines loan
types in a different manner than the tables previously presented.
115
The following table presents the Company’s nonaccrual loans as of December 31, 2015.
($ 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
$ 391
2,406
83
4,155
21,964
2,431
8,262
302
$ 39,994
22
−
−
52
5,201
361
2,180
−
7,816
413
2,406
83
4,207
27,165
2,792
10,442
302
47,810
The following table presents the Company’s nonaccrual loans as of December 31, 2014.
($ 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
$ 187
2,927
454
7,891
24,459
2,573
11,070
505
$ 50,066
1
−
103
1,140
7,785
278
1,201
−
10,508
188
2,927
557
9,031
32,244
2,851
12,271
505
60,574
116
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2015.
($ in thousands)
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
30-59
Days Past
Due
$ 632
344
28
60-89 Days
Past Due
Nonaccrual
Loans
Current
Total Loans
Receivable
−
127
−
391
2,406
83
50,878
111,803
38,875
51,901
114,680
38,986
Real estate – construction, land development & other
land loans
1,499
379
4,155
284,345
290,378
Real estate – residential, farmland, and multi-family
12,691
3,271
21,964
813,817
851,743
Real estate – home equity lines of credit
Real estate - commercial
Consumer
Total non-covered
Unamortized net deferred loan costs
Total non-covered loans
920
5,399
273
$ 21,786
96
864
255
4,992
2,431
207,998
211,445
8,262
797,855
812,380
302
39,994
43,069
2,348,640
43,899
2,415,412
873
$ 2,416,285
Covered loans
Total loans
$ 3,313
402
7,816
91,110
102,641
$ 25,099
5,394
47,810
2,439,750
2,518,926
The Company had no non-covered or covered loans that were past due greater than 90 days and accruing
interest at December 31, 2015.
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2014.
($ in thousands)
Non-covered loans
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
30-59
Days Past
Due
$ 191
1,003
30
60-89 Days
Past Due
Nonaccrual
Loans
Current
Total Loans
Receivable
35
373
225
187
2,927
454
36,871
102,671
21,761
37,284
106,974
22,470
Real estate – construction, land development & other
land loans
1,950
139
7,891
247,535
257,515
Real estate – residential, farmland, and multi-family
11,272
3,218
24,459
807,884
846,833
Real estate – home equity lines of credit
Real estate - commercial
Consumer
Total non-covered
Unamortized net deferred loan costs
Total non-covered loans
1,585
3,738
695
$ 20,464
352
996
131
5,469
2,573
194,067
198,577
11,070
738,981
754,785
505
50,066
41,865
2,191,635
43,196
2,267,634
946
$ 2,268,580
Covered loans
Total loans
$ 4,385
964
10,508
111,737
127,594
$ 24,849
6,433
60,574
2,303,372
2,396,174
The Company had no non-covered or covered loans that were past due greater than 90 days and accruing
interest at December 31, 2014.
117
The following table presents the activity in the allowance for loan losses for non-covered loans for the year
ended December 31, 2015.
($ 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, 2015
Real Estate –
Commercial
and Other
Consumer
Unallo-
cated
Total
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 8,391
(3,684)
876
(825)
$ 4,758
6,470
(2,647)
993
(1,406)
3,410
9,720
(5,682)
321
4,795
9,154
3,731
(826)
100
(264)
2,741
9,045
(2,639)
888
(2,307)
4,987
841
(1,637)
368
1,466
1,038
147
−
−
549
696
38,345
(17,115)
3,546
2,008
26,784
Ending balances as of December 31, 2015: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 190
213
1,478
313
333
160
−
2,687
$ 4,568
3,197
7,676
2,428
4,654
878
696
24,097
$ −
−
−
−
−
−
−
−
Loans receivable as of December 31, 2015:
Ending balance
Unamortized net
deferred loan
costs
Total non-covered
loans
$ 205,567
290,378
851,743
211,445
812,380
43,899
−
2,415,412
873
2,416,285
Ending balances as of December 31, 2015: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 907
4,554
23,839
376
14,818
160
−
44,654
$ 204,660
285,824
827,904
211,069
796,981
43,739
−
2,370,177
$ −
−
−
−
581
−
−
581
118
The following table presents the activity in the allowance for loan losses for non-covered loans for the year
ended December 31, 2014.
($ 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, 2014
Real Estate –
Commercial
and Other
Consumer
Unallo-
cated
Total
Beginning balance
Charge-offs
Recoveries
Transfer from
covered
category
Provisions
Ending balance
$ 7,432
(4,039)
140
36
4,822
$ 8,391
12,966
(2,148)
398
813
(5,559)
6,470
15,142
(4,417)
331
51
(1,387)
9,720
1,838
(912)
45
−
2,760
3,731
5,524
(3,048)
181
833
5,555
9,045
1,513
(1,724)
451
(152)
−
−
44,263
(16,288)
1,546
4
597
841
−
299
147
1,737
7,087
38,345
Ending balances as of December 31, 2014: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 211
415
1,686
−
165
−
−
2,477
$ 8,180
6,055
8,034
3,731
8,880
841
147
35,868
$ −
−
−
−
−
−
−
−
Loans receivable as of December 31, 2014:
Ending balance
Unamortized net
deferred loan
costs
Total non-covered
loans
$ 166,728
257,515
846,833
198,577
754,785
43,196
−
2,267,634
946
2,268,580
Ending balances as of December 31, 2014: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with deteriorated
credit quality
$ 784
7,991
24,010
476
20,263
7
−
53,531
$ 165,944
249,524
822,823
198,101
733,875
43,189
−
2,213,456
$ −
−
−
−
647
−
−
647
119
The following table presents the activity in the allowance for loan losses for covered loans for the year ended
December 31, 2015.
($ in thousands)
Covered Loans
As of and for the year ended December 31, 2015
Beginning balance
Charge-offs
Recoveries
Provision (reversal) for loan losses
Ending balance
$ 2,281
(1,316)
3,622
(2,788)
$ 1,799
Ending balances as of December 31, 2015: Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 554
1,175
70
Loans receivable as of December 31, 2015:
Ending balance – total
$ 102,641
Ending balances as of December 31, 2015: Loans
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 7,055
94,197
1,389
The following table presents the activity in the allowance for loan losses for covered loans for the year ended
December 31, 2014.
($ in thousands)
Covered Loans
As of and for the year ended December 31, 2014
Beginning balance
Charge-offs
Recoveries
Transferred to non-covered
Provision for loan losses
Ending balance
$ 4,242
(6,948)
3,616
(1,737)
3,108
$ 2,281
Ending balances as of December 31, 2014: Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 1,161
1,046
74
Loans receivable as of December 31, 2014:
Ending balance – total
$ 127,594
Ending balances as of December 31, 2014: Loans
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
$ 11,484
114,160
1,950
120
The following table presents loans individually evaluated for impairment by class of loans as of December 31,
2015.
($ in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
$ 234
128
−
276
151
−
Real estate – construction, land development & other
land loans
3,922
7,397
Real estate – residential, farmland, and multi-family
10,423
12,109
Real estate – home equity lines of credit
Real estate – commercial
−
−
9,992
11,022
Consumer
Total non-covered impaired loans with no allowance
−
$ 24,699
−
30,955
Total covered impaired loans with no allowance
$ 5,231
8,529
Total impaired loans with no allowance recorded
$ 29,930
39,484
Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
Real estate – construction, land development & other
land loans
$ 129
416
−
632
140
443
−
640
−
−
−
−
−
−
−
−
−
−
−
77
113
−
128
70
−
4,557
9,723
95
14,585
1
29,159
5,607
34,766
137
513
−
213
1,217
Real estate – residential, farmland, and multi-family
13,416
13,586
1,478
14,039
Real estate – home equity lines of credit
Real estate – commercial
376
376
5,407
5,592
Consumer
Total non-covered impaired loans with allowance
160
$ 20,536
160
20,937
313
333
160
2,687
75
3,968
32
19,981
Total covered impaired loans with allowance
$ 3,213
3,476
624
3,742
Total impaired loans with an allowance recorded
$ 23,749
24,413
3,311
23,723
Interest income recorded on non-covered and covered impaired loans during the year ended December 31,
2015 was insignificant.
121
The following table presents loans individually evaluated for impairment by class of loans as of December 31,
2014.
($ in thousands)
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Non-covered loans with no related allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
$ 33
5
−
35
6
−
Real estate – construction, land development & other
land loans
6,877
7,944
Real estate – residential, farmland, and multi-family
9,165
10,225
Real estate – home equity lines of credit
476
498
Real estate – commercial
17,409
20,786
Consumer
Total non-covered impaired loans with no allowance
7
$ 33,972
10
39,504
Total covered impaired loans with no allowance
$ 8,097
12,081
Total impaired loans with no allowance recorded
$ 42,069
51,585
−
−
−
−
−
−
−
−
−
−
−
Non-covered loans with an allowance recorded:
Commercial, financial, and agricultural:
Commercial - unsecured
Commercial - secured
Secured by inventory and accounts receivable
$ 140
606
−
143
612
−
47
164
−
20
95
−
6,430
7,776
388
11,911
7
26,627
16,986
43,613
142
550
15
Real estate – construction, land development & other
land loans
1,114
3,243
415
1,487
Real estate – residential, farmland, and multi-family
14,845
15,257
1,686
14,418
Real estate – home equity lines of credit
Real estate – commercial
−
−
3,501
3,530
Consumer
Total non-covered impaired loans with allowance
−
$ 20,206
−
22,785
−
165
−
2,477
4
6,420
8
23,044
Total covered impaired loans with allowance
$ 5,220
5,719
1,229
8,513
Total impaired loans with an allowance recorded
$ 25,426
28,504
3,706
31,557
Interest income recorded on non-covered and covered impaired loans during the year ended December 31,
2014 was insignificant.
122
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:
Watch or Standard:
Special Mention:
Classified:
1
2
3
4
9
5
6
7
8
Loans with virtually no risk, including cash secured loans.
Loans with documented significant overall financial strength. These loans have minimum
chance of loss due to the presence of multiple sources of repayment – each clearly
sufficient to satisfy the obligation.
Loans with documented satisfactory overall financial strength. These loans have a low loss
potential due to presence of at least two clearly identified sources of repayment – each of
which is sufficient to satisfy the obligation under the present circumstances.
Loans to borrowers with acceptable financial condition. These loans could have signs of
minor operational weaknesses, lack of adequate financial information, or loans supported
by collateral with questionable value or marketability.
Existing 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.
Existing loans with defined weaknesses in primary source of repayment that, if not
corrected, could cause a loss to the Bank.
An existing loan inadequately protected by the current sound net worth and paying
capacity of the obligor or the collateral pledged, if any. These loans have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt.
Loans that have a well-defined weakness that make the collection or liquidation in full
highly questionable and improbable. Loss appears imminent, but the exact amount and
timing is uncertain.
Loans that are considered uncollectible and are in the process of being charged-off. This
grade is a temporary grade assigned for administrative purposes until the charge-off is
completed.
123
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2015.
($ 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
Pass –
Mention
Acceptable/
Loans
Average
(Grade 5)
(Grade 4)
Classified
Loans
(Grades
6, 7, & 8)
Watch or
Standard
Loans
(Grade 9)
Nonaccrual
Loans
Total
Pass (Grades
1, 2, & 3)
$ 26,978
56,428
22,276
51,464
18,955
19,120
−
32
−
1,196
2,478
252
1,060
1,872
576
391
2,406
51,901
114,680
83
38,986
106,881
158,563
578
11,545
8,656
4,155
290,378
216,549
532,859
4,083
43,654
32,634
21,964
851,743
135,828
62,638
1,544
5,232
3,772
2,431
211,445
Real estate - commercial
292,433
464,824
7,605
26,339
12,917
8,262
812,380
Consumer
Total
29,617
$ 883,669
13,194
1,324,938
51
13,893
303
90,999
432
61,919
Unamortized net deferred loan costs
Total non-covered loans
302
39,994
43,899
2,415,412
873
$ 2,416,285
Total covered loans
$ 11,537
59,611
250
7,423
16,004
7,816
$ 102,641
Total loans
$ 895,206
1,384,549
14,143
98,422
77,923
47,810 $ 2,518,926
At December 31, 2015, there was an insignificant amount of loans that were graded “8” with an accruing status.
124
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2014.
($ 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
Pass –
Mention
Acceptable/
Loans
Average
(Grade 5)
(Grade 4)
Classified
Loans
(Grades
6, 7, & 8)
Watch or
Standard
Loans
(Grade 9)
Nonaccrual
Loans
Total
Pass (Grades
1, 2, & 3)
$ 17,856
32,812
15,649
62,361
10,815
9,928
5
62
−
1,356
4,481
767
2,231
4,331
506
187
2,927
37,284
106,974
454
22,470
87,806
135,072
771
13,066
12,909
7,891
257,515
221,581
520,790
4,536
40,993
34,474
24,459
846,833
122,528
62,642
1,135
5,166
4,533
2,573
198,577
Real estate - commercial
223,197
465,395
9,057
30,318
15,748
11,070
754,785
Consumer
Total
25,520
$ 742,115
15,614
1,287,451
54
15,620
855
97,002
648
75,380
Unamortized net deferred loan costs
Total non-covered loans
505
50,066
43,196
2,267,634
946
$ 2,268,580
Total covered loans
$ 14,349
70,989
632
10,503
20,613
10,508
$ 127,594
Total loans
$ 756,464
1,358,440
16,252
107,505
95,993
60,574 $ 2,396,174
At December 31, 2014, there was an insignificant amount of loans that were graded “8” with an accruing status.
As previously discussed, on July 1, 2014, the Company transferred $39.7 million of loans from the covered
category to the non-covered category as a result of the scheduled expiration of one of the Company’s loss-share
agreements with the FDIC. Approximately $2.8 million of those loans were “Special Mention Loans”, $5.5
million were “Classified Loans”, and $9.7 million were “Nonaccrual Loans.”
Troubled Debt Restructurings
The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing
financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate
reductions or below market interest rates, principal forgiveness, restructuring amortization schedules and other
actions intended to minimize potential losses.
The vast majority of the Company’s troubled debt restructurings modified during the year ended December 31,
2015 and 2014 related to interest rate reductions combined with restructured amortization schedules. The
Company does not generally grant principal forgiveness.
All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for
determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as
either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are
nonaccrual are reported within the nonaccrual loan totals presented previously.
125
The following table presents information related to loans modified in a troubled debt restructuring during the
years ended December 31, 2015 and 2014.
($ in thousands)
For the year ended
December 31, 2015
For the year ended
December 31, 2014
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
Non-covered TDRs – Accruing
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
Non-covered TDRs – Nonaccrual
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 TDRs arising during period
Total covered TDRs arising during period– Accruing
Total covered TDRs arising during period –
Nonaccrual
1
−
−
1
3
−
2
−
−
1
−
2
5
−
−
−
15
2
−
$ 8
−
−
$ 8
−
−
235
286
−
441
−
−
5
−
495
400
−
−
−
235
286
−
441
−
−
5
−
495
400
−
−
−
1,870
1,870
$ 139
$ 139
−
−
−
−
−
−
11
−
2
−
−
1
−
−
8
−
2
−
24
5
8
$ − $ −
−
−
−
2,571
−
2,416
−
−
15
−
−
770
−
98
−
−
−
−
2,571
−
2,415
−
−
15
−
−
769
−
98
−
5,870
5,868
$ 944
$ 927
966
933
Total TDRs arising during period
17
$ 2,009
$ 2,009
37
$ 7,780
$ 7,728
126
Accruing restructured loans that were modified in the previous 12 months and that defaulted during the years
ended December 31, 2015 and 2014 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
Commercial, financial, and agricultural:
Commercial – unsecured
Real estate – construction, land development & other land
loans
Real estate – residential, farmland, and multi-family
Real estate – commercial
Total non-covered TDRs that subsequently defaulted
Total accruing covered TDRs that subsequently defaulted
Total accruing TDRs that subsequently defaulted
For the year ended
December 31, 2015
For the year ended
December 31, 2014
Number
of
Contracts
Recorded
Investment
Number
of
Contracts
Recorded
Investment
1
−
4
−
5
−
5
$ 7
−
352
−
$ 359
$ −
$ 359
−
1
−
1
2
1
3
$ −
5
−
71
$ 76
$ 353
$ 429
Note 5. Premises and Equipment
Premises and equipment at December 31, 2015 and 2014 consisted of the following:
($ in thousands)
2015
2014
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
$ 23,750
66,527
36,246
1,704
128,227
(53,668)
$ 74,559
23,911
65,130
35,423
1,323
125,787
(50,674)
75,113
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, 2015 and 2014, the FDIC indemnification asset was comprised of the following components:
($ in thousands)
Receivable (payable) related to loss claims incurred (recoveries), not yet received (paid), net
Receivable related to estimated future claims on loans
Receivable related to estimated future claims on foreclosed real estate
FDIC indemnification asset
2015
$ (633)
8,675
397
$ 8,439
2014
6,899
14,933
737
22,569
127
Included in the receivable related to loss claims incurred, not yet reimbursed, at December 31, 2014, was $1.2
million related to two claims involving the same borrower. The FDIC initially denied both claims because the
FDIC disagreed with the collection strategy that the Company undertook. During the second quarter of 2015, the
Company and the FDIC reached an agreement to resolve this matter, as follows. One of the two claims
amounting to $324,000 was accepted by the FDIC and the related loan remains subject to the loss share
agreement, which provides that any future recoveries realized prior to June 30, 2017 are to be split on an
80%/20% basis with the FDIC (the FDIC receives 80%). For the other claim amounting to $886,000, the FDIC paid
the Company $480,000 and the related loan was removed from the provisions of the loss share agreement. This
will result in the Company retaining 100% of any future recoveries. As a result of this negotiated agreement,
during the second quarter of 2015, the Company wrote off the $406,000 portion of the claim not being
reimbursed by the FDIC, which is reflected in the “Other gains (losses)” line item in the Consolidated Statements
of Income.
The following presents a rollforward of the FDIC indemnification asset since January 1, 2013.
($ in thousands)
Balance at January 1, 2013
Increase (decrease) related to unfavorable (favorable) changes in loss estimates
Increase related to reimbursable expenses
Cash received
Decrease related to accretion of loan discount
Other
Balance at December 31, 2013
Increase (decrease) related to unfavorable (favorable) changes in loss estimates
Increase related to reimbursable expenses
Cash received
Decrease related to accretion of loan discount
Other
Balance at December 31, 2014
Increase (decrease) related to unfavorable (favorable) changes in loss estimates
Increase related to reimbursable expenses
Cash received
Decrease related to accretion of loan discount
Decrease related to settlement of disputed claims
Other
Balance at December 31, 2015
$ 102,559
9,312
5,352
(49,572)
(16,160)
(2,869)
$ 48,622
2,923
3,925
(17,724)
(15,281)
104
$ 22,569
(3,031)
1,232
(6,673)
(5,584)
(406)
332
$ 8,439
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, 2015 and December 31, 2014 and the carrying amount of unamortized intangible
assets as of those same dates.
($ in thousands)
Amortized intangible assets:
Customer lists
Core deposit premiums
Total
Unamortized intangible assets:
Goodwill
December 31, 2015
December 31, 2014
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$ 678
8,560
$ 9,238
550
7,352
7,902
678
8,560
9,238
505
6,675
7,180
$ 65,835
65,835
128
Amortization expense totaled $722,000, $777,000 and $860,000 for the years ended December 31, 2015, 2014
and 2013, respectively.
Goodwill is evaluated for impairment on at least an annual basis – see Note 1(q). For each of the years
presented, the Company’s evaluation indicated that there was no goodwill impairment.
The following table presents the estimated amortization expense for intangible assets for each of the five
calendar years ending December 31, 2020 and the estimated amount amortizable thereafter. These estimates
are subject to change in future periods to the extent management determines it is necessary to make
adjustments to the carrying value or estimated useful lives of amortized intangible assets.
($ in thousands)
Estimated
Amortization Expense
2016
2017
2018
2019
2020
Thereafter
Total
$ 654
404
129
122
27
−
$ 1,336
Note 8. Income Taxes
Total income taxes for the years ended December 31, 2015, 2014 and 2013 were allocated as follows:
($ in thousands)
2015
2014
2013
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 benefit of pension liabilities
Total income taxes
$ 14,126
13,535
12,081
(184)
(1,716)
$ 12,226
518
(2,103)
11,950
(2,072)
3,399
13,408
The components of income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 are as
follows:
($ in thousands)
Current - Federal
- State
Deferred - Federal
- State
Total
2015
2014
2013
$ 9,149
1,436
3,205
336
$ 14,126
1,316
903
10,104
1,212
13,535
9,812
(467)
168
2,568
12,081
129
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax
assets (liabilities) at December 31, 2015 and 2014 are presented below:
($ in thousands)
2015
2014
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
Partnership investments
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
FHLB stock dividends
Basis differences in assets acquired in FDIC transactions
All other
Gross deferred tax liabilities
Net deferred tax asset (liability) - included in other assets
$ 10,020
2,528
50
58
2,130
1,816
571
1,384
554
164
453
200
19,928
(67)
19,861
(1,451)
(1,857)
(1,313)
(11,263)
(416)
---
(12)
(16,312)
$ 3,549
14,558
2,566
78
1,066
1,779
100
1,222
---
521
219
270
212
22,591
(125)
22,466
(1,413)
(1,316)
(1,197)
(10,582)
(422)
(2,322)
(23)
(17,275)
5,191
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 2015 and 2014 deferred tax expense (benefit) of approximately ($184,000) and
$518,000 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 2015 and 2014 deferred tax
expense (benefit) of ($1,716,000) and ($2,103,000) respectively, has been recorded directly to shareholders’
equity. The balance of the 2015 decrease in the net deferred tax asset of $3,541,000 is reflected as a deferred
income tax expense, and the balance of the 2014 decrease in the net deferred tax asset of $11,316,000 is
reflected as a deferred income tax expense in the consolidated statement of income.
The valuation allowances for 2015 and 2014 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 adjusted its net deferred income tax asset as a result of reductions in the North Carolina income tax
rate, which reduced the state income tax rate to 4% effective January 1, 2016.
The Company had no significant uncertain tax positions, and thus no reserve for uncertain tax positions has
been recorded. Additionally, the Company determined that it has no material unrecognized tax benefits that if
recognized would affect the effective tax rate. The Company’s general policy is to record tax penalties and
interest as a component of “other operating expenses”.
The Company is subject to routine audits of its tax returns by the Internal Revenue Service and various state
taxing authorities. The Company’s federal tax returns through the year 2013 were audited during the year. The
Company’s state tax returns are subject to income tax audit by state agencies beginning with the year
2012. There are no indications of any material adjustments relating to any examination currently being
conducted by any taxing authority.
130
Retained earnings at December 31, 2015 and 2014 includes approximately $6,869,000 representing pre-1988 tax
bad debt reserve base year amounts for which no deferred income tax liability has been provided since these
reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a
portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987,
failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or
other distributions in dissolution, liquidation or redemption of the Bank’s stock.
The following is a reconcilement of federal income tax expense at the statutory rate of 35% to the income tax
provision reported in the financial statements.
($ in thousands)
2015
2014
2013
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
$ 14,405
(930)
(191)
11
1,152
(58)
(263)
$ 14,126
13,486
(832)
(179)
11
1,375
16
(342)
13,535
11,473
(818)
(150)
15
1,366
(3)
198
12,081
Note 9. Time Deposits and Related Party Deposits
At December 31, 2015, the scheduled maturities of time deposits were as follows:
($ in thousands)
2016
2017
2018
2019
2020
Thereafter
$ 569,562
65,143
25,604
10,840
24,080
4,335
$ 699,564
Deposits received from executive officers and directors and their associates totaled approximately $1,982,000
and $25,388,000 at December 31, 2015 and 2014, 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.
As of December 31, 2015 and 2014, the Company held $226.0 million and $256.7 million, respectively, in time
deposits of $250,000 or more (which is the current FDIC insurance limit for insured deposits as of December 31,
2015). Included in these deposits were brokered deposits of $71.8 million and $82.8 million at December 31,
2015 and 2014, respectively.
131
Note 10. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31,
2015 and 2014:
Description - 2015
Due date
Call Feature
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
Trust Preferred Securities
1/19/16
1/29/16
12/27/16
12/26/17
12/24/18
1/23/34
None
None
None
None
None
Quarterly by Company
beginning 1/23/09
2015
Amount
$ 30,000,000
50,000,000
20,000,000
20,000,000
20,000,000
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, 2015
$ 186,394,000
Description - 2014
Due date
Call Feature
FHLB Term Note
FHLB Term Note
Trust Preferred Securities
1/29/15
9/30/15
1/23/34
None
None
Quarterly by Company
beginning 1/23/09
2014
Amount
$ 50,000,000
20,000,000
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, 2014
$ 116,394,000
Interest Rate
0.41% fixed
0.38% fixed
0.76% fixed
1.19% fixed
1.57% fixed
3.02% at 12/31/15
adjustable rate
3 month LIBOR + 2.70%
1.90% at 12/31/15
adjustable rate
3 month LIBOR + 1.39%
1.14%
Interest Rate
0.20% fixed
0.44% fixed
2.96% at 12/31/14
adjustable rate
3 month LIBOR + 2.70%
1.65% at 12/31/14
adjustable rate
3 month LIBOR + 1.39%
1.05%
All outstanding FHLB borrowings may be accelerated immediately by the FHLB in certain circumstances,
including material adverse changes in the condition of the Company or if the Company’s qualifying collateral
amounts to less than that required under the terms of the FHLB borrowing agreement.
In the above tables, 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, 2015, the Company had four sources of readily available borrowing capacity – 1) an
approximately $589 million line of credit with the FHLB, of which $140 million was outstanding at December 31,
132
2015 and $70 million was outstanding at December 31, 2014, 2) a $50 million overnight federal funds line of
credit with a correspondent bank, of which none was outstanding at December 31, 2015 or 2014, 3) a $35
million federal funds line of credit with a correspondent bank, of which none was outstanding at December 31,
2015 or 2014, and 4) an approximately $88 million line of credit through the Federal Reserve Bank of
Richmond’s (FRB) discount window, of which none was outstanding at December 31, 2015 or 2014.
The Company’s line of credit with the FHLB totaling approximately $589 million can be structured as either
short-term or long-term borrowings, depending on the particular funding or liquidity needs and is secured by
the Company’s FHLB stock and a blanket lien on most of its real estate loan portfolio. The borrowing capacity
was reduced by $193 million at both December 31, 2015 and 2014, 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
$256 million at December 31, 2015.
The Company’s two correspondent bank relationships allows the Company to purchase up to $50 million and
$35 million in federal funds on an overnight, unsecured basis (federal funds purchased). The Company had no
borrowings outstanding under these lines at December 31, 2015 or 2014.
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, 2015, the available line of credit was approximately $88
million. The Company had no borrowings outstanding under this line of credit at December 31, 2015 or 2014.
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 $1.2 million in 2015, $1.2 million in 2014, and $1.1 million in 2013.
Future obligations for minimum rentals under noncancelable operating leases at December 31, 2015 are as
follows:
($ in thousands)
Year ending December 31:
2016
2017
2018
2019
2020
Thereafter
Total
$ 1,122
1,008
838
610
412
677
$ 4,667
133
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. New employees who have met the age requirement are automatically enrolled in the plan at a
5% deferral rate on the next plan Entry Date. The automatic deferral can be modified by the employee at any
time. An eligible employee may contribute up to 15% of annual salary to the plan. 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 $1.4 million for each of the years ended December 31, 2015,
2014, and 2013. Although discretionary contributions by the Company are permitted by the plan, the Company
did not make any such contributions in 2015, 2014 or 2013. The Company’s matching and discretionary
contributions are made according to the same investment elections each participant has established for their
deferral contributions.
Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the
“Pension Plan”) that qualified under Section 401(a) of the Internal Revenue Code. The Pension Plan provided for
a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final
Average Annual Compensation (5 highest consecutive calendar years’ earnings out of the last 10 years of
employment) multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65% of Final
Average Annual Compensation in excess of the average social security wage base multiplied by years of service
not in excess of 35 years. Benefits were fully vested after five years of service. Effective December 31, 2012, the
Company froze the Pension Plan for all participants.
The Company’s contributions to the Pension Plan are based on computations by independent actuarial
consultants and are intended to be deductible for income tax purposes. As discussed below, the contributions
are invested to provide for benefits under the Pension Plan. The Company did not make any contributions to
the Pension Plan in 2015, 2014 or 2013. The Company does not expect to contribute to the Pension Plan in
2016.
134
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between
the two amounts representing the funded status of the Pension Plan as of the end of the respective year.
($ 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
2015
2014
2013
$ 35,615
−
1,364
1,236
(2,051)
−
36,164
37,282
258
−
(2,051)
35,489
30,548
−
1,461
5,320
(1,714)
−
35,615
36,333
2,663
−
(1,714)
37,282
32,272
−
1,284
(2,343)
(665)
−
30,548
30,124
6,874
−
(665)
36,333
Funded status at end of year
$ (675)
1,667
5,785
The accumulated benefit obligation related to the Pension Plan was $36,164,000, $35,615,000, and $30,548,000
at December 31, 2015, 2014, and 2013, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2015 and 2014 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands)
Other assets
Other liabilities
2015
2014
$ −
(675)
$ (675)
1,667
−
1,667
The following table presents information regarding the amounts recognized in accumulated other
comprehensive income (AOCI) at December 31, 2015 and 2014, as it relates to the Pension Plan.
($ in thousands)
2015
2014
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
Net amount recognized as increase (decrease) to AOCI
$ (5,682)
−
(5,682)
2,216
$ (3,466)
(1,857)
−
(1,857)
724
(1,133)
135
The following table reconciles the beginning and ending balances of accumulated other comprehensive income
(AOCI) at December 31, 2015 and 2014, as it relates to the Pension Plan:
($ in thousands)
2015
2014
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
$ (1,133)
(3,825)
̶
̶
̶
̶
1,492
2,183
(5,436)
̶
̶
̶
̶
2,120
$ (3,466)
(1,133)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the
Pension Plan:
($ in thousands)
2015
2014
Prepaid pension cost as of beginning of fiscal year
Net periodic pension income (cost) for fiscal year
Actual employer contributions
Prepaid pension asset as of end of fiscal year
$ 3,524
1,483
̶
$ 5,007
2,206
1,318
̶
3,524
Net pension (income) cost for the Pension Plan included the following components for the years ended
December 31, 2015, 2014, and 2013:
($ in thousands)
2015
2014
2013
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
$ ̶
1,364
(2,847)
̶
$ (1,483)
̶
1,461
(2,779)
̶
(1,318)
̶
1,284
(2,307)
49
(974)
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, 2016
Year ending December 31, 2017
Year ending December 31, 2018
Year ending December 31, 2019
Year ending December 31, 2020
Years ending December 31, 2021-2025
Estimated
benefit
payments
$ 1,307
1,392
1,545
1,678
1,737
9,647
For each of the years ended December 31, 2015, 2014, and 2013, 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.
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
136
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, 2015, 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
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%
40%
10%
8%
10%
5%
1%-5%
10%-20%
5%-15%
0%-10%
30%-50%
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, 2015 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
Mid cap equity fund
Small cap growth fund
Foreign equity fund
Company stock
US Treasury T-Bill Auction Index
Barclays Intermediate Government Bond Index
Barclays Aggregate Index
Barclays High Yield Index
Russell 1000 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
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
concentration of risk exists within the plan assets at December 31, 2015.
137
The fair values of the Company’s pension plan assets at December 31, 2015, by asset category, are as follows:
($ in thousands)
Total Fair Value
at December 31,
2015
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
Small cap growth fund
Mid cap equity fund
Foreign equity fund
Company stock
Total
$ 155
3,398
3,357
1,700
14,703
2,845
3,541
3,544
2,246
$ 35,489
−
3,398
3,357
1,700
155
−
−
−
−
−
−
−
14,703
2,845
3,541
3,544
2,246
35,334
−
−
−
−
−
155
−
−
−
−
−
−
The fair values of the Company’s pension plan assets at December 31, 2014, by asset category, are as follows:
($ in thousands)
Total Fair Value
at December 31,
2014
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
$ 447
3,385
3,377
1,741
7,669
7,694
3,162
3,983
3,611
2,213
$ 37,282
−
3,385
3,377
1,741
447
−
−
−
−
−
−
−
7,669
7,694
3,162
3,983
3,611
2,213
36,835
−
−
−
−
−
−
447
−
−
−
−
−
−
−
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, 2015 and 2014.
- Money market fund: Valued at net asset value (“NAV”), which can be validated with a sufficient
level of observable activity (i.e. purchases and sales at NAV), and therefore, the funds were classified
within Level 2 of the fair value hierarchy.
- Mutual funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the
Plan are open-end mutual funds that are registered with the Securities and Exchange Commission
and are deemed to be actively traded.
- Common stock: Valued at the closing price reported on the active market on which the individual
securities are traded.
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
138
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.
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
2015
2014
2013
$ 5,216
201
206
497
(342)
̶
5,778
─
$ (5,778)
5,292
272
212
(265)
(295)
̶
5,216
─
(5,216)
6,813
304
203
(1,856)
(172)
̶
5,292
─
(5,292)
The accumulated benefit obligation related to the SERP was $5,778,000, $5,216,000, and $5,292,000 at
December 31, 2015, 2014, and 2013, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2015 and 2014 as it relates to the SERP, excluding the related deferred tax assets.
($ in thousands)
Other assets – prepaid pension asset (liability)
Other assets (liabilities)
2015
2014
$ (6,802)
1,024
$ (5,778)
(6,816)
1,600
(5,216)
139
The following table presents information regarding the amounts recognized in AOCI at December 31, 2015 and
2014.
($ 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
2015
2014
$ 1,024
−
1,024
(399)
$ 625
1,600
−
1,600
(624)
976
The following table reconciles the beginning and ending balances of accumulated other comprehensive income
(AOCI) at December 31, 2015 and 2014, as it relates to the SERP:
($ in thousands)
2015
2014
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 benefit (expense) related to changes during the year, net
Accumulated other comprehensive income (loss) at end of fiscal year
$ 976
(497)
−
(79)
−
225
$ 625
949
265
−
(221)
−
(17)
976
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
Prepaid pension cost (liability) as of end of fiscal year
2015
2014
$ (6,816)
(328)
342
$ (6,802)
(6,848)
(263)
295
(6,816)
Net pension cost for the SERP included the following components for the years ended December 31, 2015, 2014,
and 2013:
($ in thousands)
2015
2014
2013
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
$ 201
206
(79)
$ 328
272
212
(221)
263
304
203
(101)
406
140
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, 2016
Year ending December 31, 2017
Year ending December 31, 2018
Year ending December 31, 2019
Year ending December 31, 2020
Years ending December 31, 2021-2025
Estimated
benefit
payments
$ 376
378
418
415
413
2,095
The following assumptions were used in determining the actuarial information for the Pension Plan and the
SERP for the years ended December 31, 2015, 2014, and 2013:
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
2015
2014
2013
Pension
Plan
3.82%
4.17%
7.75%
n/a
SERP
3.82%
4.17%
n/a
n/a
Pension
Plan
4.78%
3.82%
7.75%
n/a
SERP
4.78%
3.82%
n/a
n/a
Pension
Plan
3.97%
4.78%
7.75%
n/a
SERP
3.97%
4.78%
n/a
n/a
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, 2015.
($ 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
$ 81
69
$ 150
Variable Rate
156
218
374
Total
237
287
524
At December 31, 2015 and 2014, the Company had $13.1 million and $14.1 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
141
terms and any collateral. Over the past two years, the Company has only had to honor a few 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,
Cumberland, Dare, Davidson, Duplin, Guilford, Harnett, Hoke, Iredell, Lee, Mecklenburg, Montgomery, Moore,
New Hanover, Onslow, Pitt, Randolph, Richmond, Robeson, Rockingham, Rowan, Scotland, Stanly and Wake
Counties in North Carolina, Chesterfield, Dillon, and Florence Counties in South Carolina, and Montgomery,
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.
142
The Company’s investment portfolio consists principally of obligations of government-sponsored enterprises,
mortgage-backed securities guaranteed by government-sponsored enterprises, corporate bonds, and general
obligation municipal securities. The Company also holds stock with the Federal Reserve Bank and the Federal
Home Loan Bank as a requirement for membership in the system. The following are the fair values at December
31, 2015 of 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
Freddie Mac – mortgage-backed securities
Fannie Mae – mortgage-backed securities
Small Business Administration
Ginnie Mae - mortgage-backed securities
Federal Home Loan Bank of Atlanta - common stock
Federal Reserve Bank - common stock
Federal Home Loan Bank System - bonds
Freddie Mac – bonds
Goldman Sachs Group Inc. corporate bond
Citigroup, Inc. corporate bond
JP Morgan Chase corporate bond
Bank of America corporate bond
Financial Institutions, Inc. corporate bond
Craven County, North Carolina municipal bond
Spartanburg, South Carolina Sanitary Sewer District municipal bond
Fannie Mae – bonds
Federal Farm Credit bonds
South Carolina State municipal bond
Virginia State Housing Authority municipal bond
Amortized Cost
$ 74,835
59,717
46,592
43,838
8,846
7,047
7,000
6,000
5,126
5,038
5,031
5,020
4,000
3,576
3,271
3,000
3,000
2,161
2,066
Fair Value
74,529
59,304
45,864
43,623
8,846
7,047
7,001
5,996
5,074
5,012
5,001
4,939
3,980
3,811
3,549
2,997
2,978
2,391
2,204
The Company places its deposits and correspondent accounts with the Federal Home Loan Bank of Atlanta, the
Federal Reserve Bank, PCBB, and Bank of America and sells its federal funds to Bank of America. At December
31, 2015, the Company had deposits in the Federal Home Loan Bank of Atlanta totaling $8.7 million, deposits of
$198.4 million in the Federal Reserve Bank, deposits of $28.2 million in Bank of America, and deposits of $0.1
million with PCBB. 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 PCBB are FDIC-insured up to $250,000. The Company also
had $6.1 million in deposits with various holders through an internet-based CD marketplace. All of these
deposits are 100% FDIC-insured.
Note 14. Fair Value of Financial Instruments
Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance
describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
143
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2015.
($ 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,
2015
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 18,972
121,553
24,946
143
$ 165,614
$ 2,588
18,057
806
9,188
—
—
—
—
—
—
—
—
—
18,972
121,553
24,946
143
165,614
—
—
—
—
—
—
—
—
—
2,588
18,057
806
9,188
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2014.
($ 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,
2014
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 27,521
129,510
865
122
$ 158,018
$ 3,991
18,035
2,350
9,771
—
—
—
—
—
—
—
—
—
27,521
129,510
865
122
158,018
—
—
—
—
—
—
—
—
—
3,991
18,035
2,350
9,771
The following is a description of the valuation methodologies used for instruments measured at fair value.
Securities Available for Sale — When quoted market prices are available in an active market, the
securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available,
but fair values can be estimated by observing quoted prices of securities with similar characteristics, the
securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s
Level 2 securities are determined by our third-party bond accounting provider using matrix pricing.
Matrix pricing is a mathematical technique widely used in the industry to value debt securities without
relying exclusively on quoted prices for the specific securities but rather by relying on the securities’
relationship to other benchmark quoted securities. For the Company, Level 2 securities include
mortgage-backed securities, collateralized mortgage obligations, government-sponsored enterprise
securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy.
144
The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the
fair value determination is consistent with the applicable accounting guidance and that the investments
are properly classified in the fair value hierarchy. Further, the Company validates the fair values for a
sample of securities in the portfolio by comparing the fair values provided by the bond accounting
provider to prices from other independent sources for the same or similar securities. The Company
analyzes unusual or significant variances and conducts additional research with the portfolio manager, if
necessary, and takes appropriate action based on its findings.
Impaired loans — Fair values for impaired loans in the above table are measured on a non-recurring
basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling
costs, or the net present value of the cash flows expected to be received for such loans. Collateral may
be in the form of real estate or business assets including equipment, inventory and accounts receivable.
The vast majority of the collateral is real estate. The value of real estate collateral is determined using
an income or market valuation approach based on an appraisal conducted by an independent, licensed
third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if
deemed significant, or the net book value on the applicable borrower’s financial statements if not
considered significant. Likewise, values for inventory and accounts receivable collateral are based on
borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3).
Any fair value adjustments are recorded in the period incurred as provision for loan losses on the
Consolidated Statements of Income.
Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or
in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-
recurring basis and is based upon independent market prices or current appraisals that are generally
prepared using an income or market valuation approach and conducted by an independent, licensed
third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure, any
excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge
against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any
excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed
real estate write-down on the Consolidated Statements of Income.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31,
2015, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description
Impaired loans – covered
Impaired loans – non-covered
Foreclosed real estate – covered
Foreclosed real estate – non-covered
Fair Value at
December 31,
2015
Valuation
Technique
$ 2,588 Appraised value;
PV of expected
cash flows
18,057 Appraised value;
PV of expected
cash flows
806 Appraised value;
List or contract
price
9,188 Appraised value;
List or contract
price
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
General Range
of Significant
Unobservable
Input Values
0-10%
0-10%
0-10%
0-10%
145
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31,
2014, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description
Impaired loans – covered
Impaired loans – non-covered
Foreclosed real estate – covered
Foreclosed real estate – non-covered
Fair Value at
December 31,
2014
Valuation
Technique
$ 3,991 Appraised value;
PV of expected
cash flows
18,035 Appraised value;
PV of expected
cash flows
2,350 Appraised value;
List or contract
price
9,771 Appraised value;
List or contract
price
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
General Range
of Significant
Unobservable
Input Values
0-10%
0-10%
0-10%
0-10%
Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or
change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities
measured on a recurring basis during the years ended December 31, 2015 or 2014.
For the years ended December 31, 2015 and 2014, the increase (decrease) in the fair value of securities available
for sale was ($473,000) and $1,329,000, respectively, which is included in other comprehensive income (net of
tax expense (benefit) of ($184,000) and $518,000, respectively). Fair value measurement methods at December
31, 2015 and 2014 are consistent with those used in prior reporting periods.
As discussed in Note 1(p), the Company is required to disclose estimated fair values for its financial instruments.
Fair value estimates as of December 31, 2015 and 2014 and limitations thereon are set forth below for the
Company’s financial instruments. See Note 1(p) for a discussion of fair value methods and assumptions, as well
as fair value information for off-balance sheet financial instruments.
($ 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
Accrued interest receivable
FDIC indemnification asset
Bank-owned life insurance
Deposits
Borrowings
Accrued interest payable
Level in
Fair
Value
Hierarchy
December 31, 2015
December 31, 2014
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
$ 53,285
$ 53,285
81,068
81,068
Level 1
Level 1
Level 2
Level 2
Level 1
Level 3
Level 1
Level 3
Level 1
Level 2
Level 2
Level 2
213,426
557
165,614
154,610
4,323
2,490,343
9,166
8,439
72,086
2,811,285
186,394
585
146
213,426
557
165,614
157,146
4,323
2,484,059
9,166
8,256
72,086
2,809,828
178,468
585
171,248
768
158,018
178,687
6,019
2,355,548
8,920
22,569
55,421
2,695,906
116,394
686
171,248
768
158,018
182,411
6,019
2,328,244
8,920
21,856
55,421
2,696,153
105,407
686
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
The Company recorded total stock-based compensation expense of $710,000, $270,000 and $222,000 for the
years ended December 31, 2015, 2014, and 2013, respectively. Stock based compensation is reflected as an
adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows.
The Company recognized $277,000, $105,000, and $87,000 of income tax benefits related to stock based
compensation expense in the income statement for the years ended December 31, 2015, 2014, and 2013,
respectively.
At December 31, 2015, the Company had the following equity-based compensation plans: the First Bancorp 2014
Equity Plan, the First Bancorp 2007 Equity Plan, and the First Bancorp 2004 Stock Option Plan. The Company’s
shareholders approved all equity-based compensation plans. The First Bancorp 2014 Equity Plan became
effective upon the approval of shareholders on May 8, 2014. As of December 31, 2015, the First Bancorp 2014
Equity Plan was the only plan that had shares available for future grants, and there were 919,659 shares
remaining available for grant.
The First Bancorp 2014 Equity Plan is intended to serve as a means to attract, retain and motivate key
employees and directors and to associate the interests of the plans’ participants with those of the Company and
its shareholders. The First Bancorp 2014 Equity Plan allows for both grants of stock options and other types of
equity-based compensation, including stock appreciation rights, restricted stock, restricted performance stock,
unrestricted stock, and performance units.
Recent equity grants to employees have either had performance vesting conditions, service vesting conditions,
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. The Company issues new
shares of common stock when options are exercised.
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 recognizes
compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite
service period for each incremental award. Compensation expense is based on the estimated number of stock
options and awards that will ultimately vest. Over the past five years, there have only been minimal amounts of
147
forfeitures, and therefore the Company assumes that all awards granted without performance conditions will
become vested.
As it relates to director equity grants, the Company grants common shares, valued at approximately $16,000 to
each non-employee director (currently eight 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. Total stock-
based compensation expense related to these grants was $129,000, $177,000, and $193,000 for each the three
years ended December 31, 2015, 2014 and 2013, respectively, and is classified as “other operating expense” in
the Consolidated Statements of Income.
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 would
have fully vested on December 31, 2014 if the Company achieved a certain earnings target for 2014. The
Company did not achieve the applicable target and therefore the award was forfeited as of December 31, 2014.
No compensation expense was recognized for the option award. The restricted stock award would have fully
vested on December 31, 2015, if the Company achieved a certain earnings target for 2015. The Company did
not achieve the applicable target, and therefore the restricted stock award was forfeited as of December 31,
2015. No compensation expense was recognized for the restricted stock award.
Based on the Company’s performance in 2013, the Company granted long-term restricted shares of common
stock to the chief executive officer on February 11, 2014 with a two-year vesting period. The total
compensation expense associated with the grant was $278,200. The Company recorded $92,800 in
compensation expense related to this grant during 2015 and 2014.
In 2014, the Company’s Compensation Committee determined that seven of the Company’s senior officers
would receive their annual bonus earned under the Company’s annual incentive plan in a mix of 50% cash and
50% stock, with the stock being subject to a three year vesting term. Previously, awards under this plan were
paid all in cash. This resulted in the Company granting a total of 14,882 shares of restricted common stock to
those officers on February 24, 2015. The total compensation expense associated with this grant was $258,000,
which is being recorded over the vesting period. The Company recorded $93,100 in compensation expense
during 2015 related to these grants.
In 2015, additional stock grants of 50,736 shares were made to 19 officers of the Company, each with three year
vesting schedules. The total value of these grants amounted to $876,000, of which $395,000 was recorded as
expense in during 2015. Grants were issued based on the closing price of the Company’s common stock on the
date of the grant.
The Company’s equity grants for 2014 were the issuance of 1) 15,657 shares of long-term restricted stock to the
chief executive officer on February 11, 2014, at a fair market value of $17.77 per share, which was the closing
price of the Company’s common stock on that date, and 2) 10,065 shares of common stock to non-employee
directors on June 2, 2014 (915 shares per director), at a fair market value of $17.60 per share, which was the
closing price of the Company’s common stock on that date.
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.
Under the terms of the predecessor plans and the First Bancorp 2014 Equity Plan, stock options can have a term
of no longer than ten years. In a change in control (as defined in the plans), unless the awards remain
outstanding or substitute equivalent awards are provided, the awards become immediately vested .
148
At December 31, 2015, there were 117,408 stock options outstanding related to the three First Bancorp plans,
with exercise prices ranging from $14.35 to $21.83.
The following table presents information regarding the activity since January 1, 2013 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 January 1, 2013
487,530
$ 17.64
Granted
Exercised
Forfeited
Expired
−
−
−
(94,872)
−
−
−
17.36
Balance at December 31, 2013
392,658
$ 17.71
Granted
Exercised
Forfeited
Expired
−
(4,500)
(75,000)
(134,056)
−
15.58
9.76
21.10
Balance at December 31, 2014
179,102
$ 18.55
Granted
Exercised
Forfeited
Expired
−
(7,353)
−
(54,341)
−
15.20
−
19.93
$ 6,525
$ 19,843
Outstanding at December 31, 2015
117,408
$ 18.12
1.57
$ 206,134
Exercisable at December 31, 2015
117,408
$ 18.12
1.57
$ 206,134
In 2015 and 2014, the Company received $112,000 and $70,000, respectively, as a result of stock option
exercises. No stock options were exercised in 2013. The Company recorded insignificant tax benefits from the
exercise of nonqualified stock options during the years ended December 31, 2015, 2014, and 2013.
The following table summarizes information about the stock options outstanding at December 31, 2015:
Range of
Exercise Prices
$14.35
$14.36 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 12/31/15
Options Exercisable
Number
Exercisable
at 12/31/15
Weighted-
Average
Exercise
Price
18,000
49,408
18,000
32,000
117,408
2.6
2.0
1.0
0.7
1.6
$ 14.35
16.64
19.61
21.67
$ 18.12
18,000
49,408
18,000
32,000
117,408
$ 14.35
16.64
19.61
21.67
$ 18.12
149
The following table presents information regarding the activity during 2013, 2014, and 2015 related to the
Company’s outstanding restricted stock:
Long-Term Restricted Stock
Weighted-
Average
Grant-Date
Fair Value
Number of
Units
Nonvested at January 1, 2013
54,344
$ 10.48
Granted during the period
Vested during the period
Forfeited or expired during the period
–
(6,163)
(2,807)
–
14.54
10.96
Nonvested at December 31, 2013
45,374
$ 9.90
Granted during the period
Vested during the period
Forfeited or expired during the period
15,657
(10,593)
̶
17.77
14.32
̶
Nonvested at December 31, 2014
50,438
$ 11.42
Granted during the period
Vested during the period
Forfeited or expired during the period
65,618
(20,117)
(40,610)
17.28
17.44
9.87
Nonvested at December 31, 2015
55,329
$ 17.31
Note 16. Regulatory Restrictions
The Company is regulated by the Federal Reserve Board (FED) and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank is regulated by the FED and the
North Carolina Commissioner of Banks. Until April 22, 2015, the Bank was regulated by the FDIC. Effective April
22, 2015, the Bank became a member of the Federal Reserve, and therefore, the FED replaced the FDIC as the
Bank’s primary federal regulator.
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,
2015, the Bank had undivided profits of approximately $153,305,000 which were available for the payment of
dividends (subject to remaining in compliance with regulatory capital requirements). As of December 31, 2015,
approximately $235,204,000 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 $1,702,000 for the year ended December 31, 2015.
The Company and the Bank must comply with regulatory capital requirements established by the FED. 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
150
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.
In 2013, the FED approved final rules implementing the Basel Committee on Banking Supervision capital
guidelines, referred to a “Basel III.” The final rules established a new “Common Equity Tier I” ratio; new higher
capital ratio requirements, including a capital conservation buffer; narrowed the definitions of capital; imposed
new operating restrictions on banking organizations with insufficient capital buffers; and increased the risk
weighting of certain assets. The final rules became 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% in January 1, 2019.
As of December 31, 2015, the capital standards require the Company to maintain minimum ratios of “Common
Equity Tier I” capital to total risk-weighted assets, “Tier I” capital to total risk-weighted assets, and total capital
to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively. Common Equity Tier I capital is comprised of
common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible
assets, net of associated deferred tax liabilities. Tier I capital is comprised of Common Equity Tier I capital plus
Additional Tier I Capital, which for the Company includes non-cumulative perpetual preferred stock and trust
preferred securities. Total capital is comprised of Tier I capital plus certain adjustments, the largest of which is
our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted
for their related risk levels using formulas set forth in FED 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 of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its
regulators. The FED 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, 2015 and 2014 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.
151
Also see Note 19 for discussion of preferred stock transactions that have affected the Company’s capital ratios.
($ in thousands)
As of December 31, 2015
Common Equity Tier I Capital Ratio
Company
Bank
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
Actual
Amount
Ratio
Fully Phased-In Regulatory
Guidelines Minimum
Ratio
Amount
(must equal or exceed)
To Be Well Capitalized
Under Current Prompt
Corrective Action Provisions
Ratio
Amount
(must equal or exceed)
$ 282,766
332,822
11.22%
13.22%
$ 176,344
176,231
7.00%
7.00%
$ N/A
163,643
364,125
361,405
335,053
332,822
335,053
332,822
14.45%
14.36%
264,515
264,347
10.50%
10.50%
N/A
251,759
13.30%
13.22%
10.38%
10.32%
214,131
213,995
129,087
129,014
8.50%
8.50%
4.00%
4.00%
N/A
201,407
N/A
161,267
N/A
6.50%
N/A
10.00%
N/A
8.00%
N/A
5.00%
For Capital Adequacy
Purposes (pre-Basel III)
(must equal or exceed)
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
(must equal or exceed)
As of December 31, 2014 (pre-Basel III)
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
$ 393,480
391,216
17.60%
17.52%
$ 178,811
178,679
365,384
363,141
365,384
363,141
16.35%
16.26%
11.61%
11.55%
89,406
89,339
125,856
125,784
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
$ N/A
223,348
N/A
134,009
N/A
157,229
N/A
10.00%
N/A
6.00%
N/A
5.00%
152
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, 2015, 2014, and 2013 are as follows:
($ in thousands)
2015
2014
2013
Other service charges, commissions, and fees – debit card interchange income
Other service charges, commissions, and fees – other interchange income
$ 6,433
2,288
6,137
1,786
5,637
1,402
Other operating expenses – interchange expense
Other operating expenses – stationery and supplies
Other operating expenses – telephone and data line expense
Other operating expenses – FDIC insurance expense
Other operating expenses – data processing expense
Other operating expenses – dues and subscriptions
Other operating expenses – repossession and collection – non-covered
Other operating expenses – outside consultants
Other operating expenses – legal and audit
Other operating expenses – severance pay
2,181
2,039
2,133
2,394
1,935
1,710
2,167
1,677
1,689
221
1,728
1,710
1,990
3,988
1,654
1,716
2,092
1,663
1,955
512
2,508
2,078
1,489
2,803
−
1,580
2,216
2,460
1,204
1,895
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,
2015
2014
$ 3,816
384,926
7
1,652
$ 390,401
$ 46,394
1,817
48,211
342,190
$ 390,401
4,272
430,436
7
1,641
436,356
46,394
2,263
48,657
387,699
436,356
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31,
2015
2014
2013
Dividends from wholly-owned subsidiaries
Earnings of wholly-owned subsidiaries, net of dividends
Interest expense
All other income and expenses, net
Net income
Preferred stock dividends
$ 72,500
(43,328)
(1,032)
(1,106)
27,034
(603)
9,000
18,343
(1,007)
(1,340)
24,996
(868)
10,500
12,102
(1,025)
(878)
20,699
(895)
Net income available to common shareholders
$ 26,431
24,128
19,804
153
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
2015
Year Ended December 31,
2014
2013
Operating Activities:
Net income
Excess of dividends over earnings of subsidiaries (Equity in
undistributed earnings of subsidiaries)
Decrease in other assets
Increase (decrease) in other liabilities
Total – operating activities
Financing Activities:
Payment of preferred and common cash dividends
Redemption of preferred stock
Proceeds from issuance of common stock
Stock withheld for payment of taxes
Total - financing activities
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Note 19. Shareholders’ Equity Transactions
Small Business Lending Fund
$ 27,034
24,996
20,699
43,328
1
(272)
70,091
(7,105)
(63,500)
112
(54)
(70,547)
(456)
4,272
$ 3,816
(18,343)
23
489
7,165
(7,171)
─
70
─
(7,101)
64
4,208
4,272
(12,102)
─
(217)
8,380
(7,507)
─
─
─
(7,507)
873
3,335
4,208
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. On June
25, 2015, the Company redeemed $32 million (32,000 shares) of the outstanding SBLF Stock. The shares were
redeemed at their liquidation value of $1,000 per share plus accrued dividends. On October 16, 2015, the
Company redeemed the remaining $31.5 million (31,500 shares) of the outstanding SBLF Stock. The shares were
redeemed at their liquidation value of $1,000 per share plus accrued dividends. With these redemptions, the
Company ended its participation in the SBLF.
The Series B Preferred Stock qualified 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 “temporary fixed rate period”), the dividend rate was fixed at
between one percent (1%) and seven percent (7%) based upon the level of QSBL compared to the baseline.
After four and one half years from the issuance, the dividend rate would increase to nine percent (9%). For
quarters subsequent to the issuance in 2011, the Company was able to continually increase its level of small
business lending and as a result, the dividend rate has steadily decreased from 5.0% in 2011 to 1.0% in early
2013. From that point through redemption of the Series B Preferred Stock, the Company was in the “temporary
fixed rate period,” in which the dividend rate was fixed at 1%.
For the twelve months ended December 31, 2015, 2014 and 2013, the Company accrued approximately
$370,000, $635,000 and $662,000, 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.”
154
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 classified 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
each of 2015, 2014 and 2013, the Company accrued approximately $233,000 in preferred dividend payments for
the Series C Preferred Stock.
Note 20. Subsequent Events
On January 1, 2016, the Company completed the acquisition of Bankingport, Inc., an insurance agency based in
Sanford, North Carolina. The purchase price was a mix of cash and stock with a total value of approximately
$2.2 million, with additional earn out provisions.
On March 4, 2016, the Company announced that it had entered into an agreement with First Community Bank,
Bluefield, Virginia, pursuant to which the Bank is exchanging its branch network in Virginia, which is comprised
of seven branches in the southwestern area of Virginia, for six of First Community Bank’s branches located in
North Carolina. According to the agreement, the Bank will acquire a total of six branches, with four of the
branches being in Winston-Salem, one branch being Mooresville and the other branch being in
Huntersville. These six branches have total deposits of approximately $130 million. At the same time, the Bank
will sell its all seven of its Virginia branches to First Community Bank, which currently have total deposits of
approximately $150 million. Additionally, the swap will include up to $175 million of loans. Subject to
regulatory approval and the satisfaction of customary closing conditions, the transaction is expected to close in
the third quarter of 2016.
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, 2015 and 2014, and the related consolidated statements of income,
comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended
December 31, 2015. 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, 2015 and 2014, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013, and our report dated March 14, 2016 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Elliott Davis Decosimo, PLLC
Charlotte, North Carolina
March 14, 2016
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, 2015, based on criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (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, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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, 2015, 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, 2015 and 2014 and the
related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for
157
each of the three years in the period ended December 31, 2015 and our report dated March 14, 2016 expressed
an unqualified opinion thereon.
/s/ Elliott Davis Decosimo, PLLC
Charlotte, North Carolina
March 14, 2016
158
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 (2013). 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, 2015.
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.
159
Elliott Davis Decosimo, PLLC, an independent, registered public accounting firm, has audited the Company’s
consolidated financial statements as of and for the year ended December 31, 2015, and audited the Company’s
effectiveness of internal control over financial reporting as of December 31, 2015, 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 2015 that were reasonably likely to materially affect our internal control over financial
reporting.
Item 9B. Other Information
Not applicable.
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.
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.
160
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. Except as
noted below the exhibits identified have SEC File No. 000-15572. 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 (Commission
File No. 333-167856), and are incorporated herein by reference. Articles of Amendment to the Articles
of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on
September 6, 2011, and are incorporated herein by reference. Articles of Amendment to the Articles of
Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December
26, 2012, and are incorporated herein by reference.
3.b
Amended and Restated Bylaws of the Company were filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K filed on 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
Form of Indemnification Agreement between the Company and its Directors and Officers.
10.b
First Bancorp Senior Management Supplemental Executive Retirement Plan was filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on December 22, 2006, and is incorporated herein by
reference. (*)
10.c
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. (*)
161
10.d
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.e
First Bancorp 2014 Equity Plan was filed as Appendix B to the Registrant’s Form Def 14A filed on April 4,
2014, and is incorporated herein by reference. (*)
10.f
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.g
Advances and Security Agreement with the Federal Home Loan Bank of Atlanta dated February 15, 2005
was attached as Exhibit 99(a) to the Company’s Current Report on Form 8-K filed on February 22, 2005,
and is incorporated herein by reference.
10.h Form of Stock Option and Performance Unit Award Agreement was filed as Exhibit 10 to the Company’s
Current Report on Form 8-K filed on June 23, 2008, and is incorporated herein by reference. (*)
10.i
10.j
10.k
10.l
Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K was filed as
Exhibit 10.o to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and
is incorporated herein by reference. (*)
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 Current Report on Form 8-K filed on June 24, 2009, and is
incorporated herein by reference.
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. (*)
10.m 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.
10.n
10.o
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.
10.p
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. (*)
162
10.q
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.r
Employment Agreement between the Company and Michael G. Mayer dated March 10, 2014 was filed
as Exhibit 10.z to the Company's Annual Report on Form 10-K for the year ended December 31, 2013,
and is incorporated herein by reference. (*)
10.s Amendment to the First Bancorp Senior Management Supplemental Executive Retirement Plan dated
March 11, 2014 was filed as Exhibit 10.aa to the Company's Annual Report on Form 10-K for the year
ended December 31, 2013, and is incorporated herein by reference. (*)
10.t
Employment Agreement between the Company and Edward F. Soccorso dated March 19, 2014 was filed
as Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014,
and is incorporated herein by reference. (*)
10.u The First Bancorp Annual Incentive Plan was filed as Exhibit 10(a) to the Company’s Current Report on
Form 8-K filed on August 1, 2014, and is incorporated herein by reference. (*)
10.v Employment Agreement between the Company and Eric P. Credle dated November 7, 2014 was filed as
Exhibit 10.a to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
2014, and is incorporated herein by reference. (*)
10.w The Company’s Annual Incentive Plan for certain employees and executive officers was filed as Exhibit
10(a) to the Company’s Current Report on Form 8-K filed on March 2, 2015, and is incorporated herein
by reference. (*)
12
21
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.
23
Consent of Independent Registered Public Accounting Firm, Elliott Davis Decosimo, 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, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of
Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated
163
Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
______________
(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, Elizabeth B. Bostian, Secretary, 300
SW Broad Street, Southern Pines, North Carolina, 28387.
164
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 14th day of March 2016.
SIGNATURES
First Bancorp
By: /s/ Richard H. Moore
Richard H. Moore
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.
/s/ Eric P. Credle
Eric P. Credle
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
March 14, 2016
/s/ O. Temple Sloan, III
O. Temple Sloan, III
Director
March 14, 2016
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
March 14, 2016
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
March 14, 2016
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
March 14, 2016
Executive Officers
/s/ Richard H. Moore
Richard H. Moore
Chief Executive Officer and Treasurer
March 14, 2016
Board of Directors
/s/ Mary Clara Capel
Mary Clara Capel
Chairman of the Board
Director
March 14, 2016
/s/ Daniel T. Blue, Jr.
Daniel T. Blue, Jr.
Director
March 14, 2016
s/ James C. Crawford, III
James C. Crawford, III
Director
March 14, 2016
/s/ Richard H. Moore
Richard H. Moore
Director
March 14, 2016
/s/ Thomas F. Phillips
Thomas F. Phillips
Director
March 14, 2016
165
Shareholder Information
Corporate Office
300 SW Broad Street
Southern Pines, NC 28387
Customer Service: 866-792-4357
www.LocalFirstBank.com
Independent Auditors
Elliott Davis Decosimo, PLLC
Charlotte, NC
Corporate Counsel
Nelson Mullins Riley & Scarborough, LLP
Charlotte, NC
Transfer Agent
Computershare
480 Washington Boulevard
Jersey City, NJ 07310
800-942-5909
www.computershare.com
Shareholders Meeting
The Annual Meeting will be held on May 12, 2016 at 10:00 am at
the James H. Garner Conference Center in Troy, North Carolina.
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. Choose About
Us at www.LocalFirstBank.com and select Investor Relations.
First Bancorp offers online access to all financial
publications, including annual reports and quarterly reports filed
with the Securities and Exchange Commission. Choose About Us
at www.LocalFirstBank.com and select Investor Relations.
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.
Copies of Form 10-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
or
by visiting our corporate website at
www.LocalFirstBank.com
Common Stock Information
First Bancorp’s common stock is traded on the
NASDAQ Global Select Market under the symbol FBNC. There
were 19,747,509 shares outstanding as of December 31, 2015
with 2,300 shareholders of record and approximately 3,100
additional shareholders that held their shares in “street name.”
Dividend Reinvestment
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:
Direct Deposit
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.
Investor Relations
Elizabeth Bostian
866-792-4357
or
Computershare
480 Washington Boulevard
Jersey City, NJ 07310
800-942-5909
www.computershare.com
FIRST
BANCORP
L O C A L F I R S T B A N K . C O M
300 SW Broad Street
Southern Pines, NC 28387