First Bancorp
Annual Report
2016
Invigorated Growth
Selected Financial Data
Years Ended December 31
($ in thousands except share data)
2016
2015
CHANGE 2015
TO 2016
SELECTED INCOME STATEMENT DATA
Net interest income
Provision (reversal) for loan losses
Noninterest income
Noninterest expenses
Income taxes
Net income
Preferred stock dividends
Net income - common shareholders
PER SHARE DATA
Earnings per common share - basic
Earnings per common share - diluted
Cash dividends declared - common
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Market Price:
High
Low
Close
Book value - common
Tangible book value - common
SELECTED BALANCE SHEET DATA
(at year end)
Assets
Loans
Deposits
Shareholders’ Equity
PERFORMANCE RATIOS
Return on average assets
Return on average common equity
NONFINANCIAL DATA
Common shares outstanding
Number of branches
Number of employees - full/part time
3.0%
-97.1%
36.2%
8.9%
3.5%
1.8%
-71.0%
3.4%
2.2%
2.3%
0.0%
43.0%
14.3%
44.8%
4.1%
2.1%
7.5%
7.6%
4.8%
7.6%
-2.4%
-3.9%
$ 123,380
119,747
(23)
25,551
106,821
14,624
27,509
175
27,334
$ 1.37
1.33
0.32
28.49
17.15
27.14
17.66
13.85
(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
$ 3,614,862
2,710,712
2,947,353
368,101
3,362,065
2,518,926
2,811,285
342,190
0.80%
7.73%
0.82%
8.04%
20,844,505
19,747,509
88
806/55
88
783/57
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Dear Shareholders,
Customers and Friends,
The year ended December 31, 2016 was another outstanding
year for our company. Earnings growth continued, while
we also achieved a number of important initiatives that
position the company well for the future. And importantly,
our shareholders experienced an excellent return on their
investment for the year, with a total return of 47.1%.
For the twelve months ended December 31, 2016, we earned
$27.3 million, or $1.33 per diluted common share, which was
a 2.3% increase from the $26.4 million, or $1.30 per diluted
common share, earned in 2015. Earnings for 2016 were
impacted by a charge we recorded associated with our exit from
FDIC loss share agreements and merger-related expenses, the
effects of which were partially offset by a gain recorded related
to an exchange of branches. Each of these items is described
more below. Our earnings for the fourth quarter of 2016 were
absent of any significant unusual items and were excellent,
amounting to $8.4 million, or $0.40 per diluted common share,
a 21.2% increase from the fourth quarter of 2015.
In addition to the strong earnings, we achieved good balance
sheet growth in 2016, reflecting the ongoing success of
several growth initiatives. Total loans increased 7.6% during
the year and amounted to $2.7 billion at year end. Deposits
grew by 4.8%, with transaction accounts, our lowest cost
source of funds, growing by 8.3%.
Our Continued Expansion
Beginning in 2015, we began an initiative to expand into high
growth markets of North Carolina. We commenced with the
opening of 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 in October 2015, we opened a full
service branch there with seasoned bankers in place. This
branch has prospered, and we expect future growth in
this market for years to come.
In 2016, we continued our expansion plans with investments
in Charlotte, Raleigh and the Triad area of North Carolina.
Several seasoned bankers joined our bank and have
successfully led our expansion efforts in these attractive
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Richard H. Moore
C E O F I R S T B A N C O R P
“In addition to the
strong earnings,
we achieved
good balance
sheet growth in
2016, reflecting
the ongoing
success of several
growth initiatives.”
Since 1935, we’ve served
our communities with
uncompromising excellence.
First Bank’s Legacy
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All Systems Go.
B U I L D I N G S P E E D
This past year and the one ahead reflect
the bank moving ahead at full throttle.
New locations include Winston-Salem,
Huntersville, Charlotte, Greenville, and
Raleigh. And in markets like Rockingham
and Washington, we renovated spaces to
reflect the positive energy and momentum
of a community bank on the rise.
N E W B R A N C H E S ,
N E W P O S S I B I L I T I E S
In an update to the US News & World
Report Best Place to Live Rankings, the
Raleigh-Durham area came in at #7 and
Charlotte closely followed at #14. With the
new branch opening in Charlotte in 2016
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and the Raleigh loan office’s transition
to a branch later in 2017, First Bank is
making headway into metro markets that
are growing in population and potential.
W I N S T O N - S A L E M
R A L E I G H
H U N T E R S V I L L E
C H A R L O T T E
G R E E N V I L L E
markets. We opened our first full service branch in
Charlotte in August 2016, after the success of a loan
production office opened there in 2015. In Raleigh, we
opened a loan production office early in 2016 and are
upgrading our capabilities in the state’s capital with
a full service branch later this year. In the Triad, which
includes Greensboro, High Point and Winston-Salem,
experienced bankers joined us in early 2016 as we
opened a loan production office in Greensboro. Our
expansion into this market was significantly enhanced
by two strategic transactions that I will now discuss.
A Win-Win
In March 2016, we announced an agreement to
exchange our seven Virginia branches for six
North Carolina branches of a community bank with
a large Virginia presence. Four of the six branches
we assumed were in Winston-Salem, with the other
two branches located in the Charlotte-metro markets
of Mooresville and Huntersville. The Winston-Salem
branches we assumed were a nice fit for our new
Triad expansion initiative, while the Mooresville and
Huntersville branches worked well with our Charlotte
expansion. This transaction resulted in our exit from
Virginia, which was a good market for our bank but
created challenges due to the distant proximity to
our core market. We recorded a gain of $1.4 million
related to this exchange.
Addition by Acquisition
In June 2016, we announced an agreement to acquire
Carolina Bank Holdings, Inc., the parent company of
Carolina Bank. Carolina Bank is a community bank
headquartered in Greensboro with $700 million in
assets, with branches located in Greensboro, Winston-
Salem, Burlington and Asheboro. This acquisition
builds on our Winston-Salem expansion just discussed
and significantly accelerates our recent expansion
initiative in the Greensboro market. We completed
this acquisition on March 3, 2017.
Along with the investments we made along the
Interstate 85/40 corridors, we are also continually
reinvesting in our traditional footprint. During
2016, we upgraded our facilities in Rockingham
A New Look.
C A T C H I N G M O R E E Y E S
As you drive past our branches, browse
our site, or spot one of our ads, you’ll
see the updated First Bank logo. We
brightened the red and modernized the
font to make it easier than ever to spot
a First Bank anywhere you go.
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and Washington with the construction of beautiful
new branches that will serve our customers in those
communities for decades to come. And in Greenville,
North Carolina, we increased our service capabilities
by converting a loan production office we had opened
in 2012 into a full service branch in a wonderful, newly
constructed building.
Growing Our Revenue Sources
In 2016, we also completed initiatives to diversify
and grow noninterest revenue sources outside of our
community banking model. In January, we completed
our purchase of Bankingport, Inc. an insurance agency
located in Sanford, North Carolina. 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 are
achieving economies of scale and providing a larger
platform for leveraging insurance services throughout
our bank network.
In May, we completed the purchase of SBA Complete.
SBA Complete is a firm with niche expertise in the
origination and servicing of loans guaranteed by
the Small Business Administration (“SBA”). Many
community banks do not have the in-house capability
to comprehensively originate and service those types
of loans, so they contract with SBA Complete for
assistance. SBA Complete has 280 bank clients that
it serves from its headquarters in California with 37
employees. SBA Complete generated fees of $3.2
million for our company from the May acquisition
date through the end of the year. To learn more
about this subsidiary of our company, please visit
www.sbacomplete.com.
Soon after the acquisition of SBA Complete, we
leveraged its capabilities by launching our own
SBA loan origination division. Through a network of
specialized First Bank loan officers, this division offers
SBA loans to small business owners throughout the
United States. We typically sell the portion of each
loan that is guaranteed by the SBA at a premium
and record the non-guaranteed portion to our
balance sheet. This division realized $1.4 million in
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loan sale gains in the second half of the year. To
learn more about this division of our bank, please
visit www.firstbanksba.com.
million for the first time. We expect that our recent
initiatives and investments will result in future
appreciation for our shareholders.
The three initiatives that I just discussed added a total
of approximately $5.6 million in additional revenue
to our company, which is a significant step forward in
growing our company’s total revenue and diversifying
its sources. We expect these areas to contribute
even more revenue in 2017 and beyond.
Concluding a Successful Partnership
Another significant initiative for 2016 was the early
termination of loss share agreements we had with the
FDIC related to our acquisition of two failed banks
during the height of the recession. The last loss share
agreement was not scheduled to expire until 2021,
and the agreements came with extensive reporting
and audit requirements. After having resolved most of
the problem assets associated with the two banks in
the years following the acquisitions, we believed it was
appropriate to consider concluding the agreements.
In September 2016, we reached mutually acceptable
terms with the FDIC to terminate these agreements,
which resulted in an immediate charge to earnings of
$5.7 million related to the write-off of the associated
indemnification asset. Without the termination, it is
likely that we would have continued to systematically
amortize that asset as expense, and thus we believe
the accelerated write-off will improve future earnings.
Shareholder Return
In addition to the accomplishments I’ve discussed,
it was also very satisfying to see our shareholders
rewarded with strong stock performance. We started
the year with a stock price of $18.74 and ended it at
$27.14, an increase of 44.8%. When reinvestment of
dividends is included, our total return for the year
was 47.1%, which exceeded the return of a peer
index of $1-$5 billion asset banks. First Bancorp’s
stock price has now risen for five consecutive years.
And just a few weeks ago, our stock price closed at
an all time high of $30.60 per share. The recent rise
in our stock price has also resulted in the market
capitalization of our company exceeding $600
Smart Investments
In addition to the initiatives previously discussed,
we are continually investing in technology. We live
in an increasingly digital world, and technology
advances continue to change the way banks interact
with customers. While we believe a physical presence
is beneficial 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 activities. We believe
our suite of internet banking products remains best-
in-class, and we continue to make investments in
this area. Our mobile check deposit feature, which
allows customers to deposit a check by simply taking
a picture of it, has quickly become one of the most
popular features. In 2016, we upgraded our mobile
banking app to allow customers with fingerprint
enabled phones to use your fingerprint to gain
access to our mobile banking app. We will continue
to remain on the leading edge of online technology.
As our customers 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.
Commitment to Our Customers
The underpinning for everything we do is our
emphasis on customer service. In 2015, under the
leadership of First Bank President Mike Mayer,
we initiated “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.
“The underpinning
for everything we do
is our emphasis on
customer service.”
Commitment to Our Customers
Thinking Ahead.
S U P P O R T I N G D R E A M S
Our mission is to help our clients achieve
their dreams. One of the ways we’re
doing that is by completing strategic
acquisitions that expand our offerings
and broaden the potential for noninterest
income. At the start of 2016, we acquired
Bankingport Insurance Agency out of
Sanford, North Carolina. Then a few
months later, we acquired SBA Complete
in California. These two companies allow
First Bank to better serve the insurance
and business loan needs of our customers.
G R O W I N G T O M E E T
O U R C L I E N T S N E E D S
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In addition to acquisitions, First Bank
grew its footprint in the Triad area
with the branch exchange with
First Community Bank. We now
have four strong branches in
Winston-Salem, and two more outside
of Charlotte in Huntersville and
Mooresville. This positions us well
in the market, especially as we look
ahead to integrating the Carolina Bank
acquisition, which added branches in
Greensboro and Winston-Salem.
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As employees, we are energized and are doing
everything possible to help make our customers’
dreams come true.
Changing of the Board
In February 2017, we completed a scheduled change
in the leadership of our Board of Directors. After four
years of leading our board as chairman, Mary Clara
Capel passed the gavel to James (Jim) Crawford, III. I’d
like to thank Mary Clara for her years of steady and wise
leadership and am thankful that she will continue to
serve as a board member. Jim Crawford joined our board
almost 10 years ago, and his dedication to our company
has been a benefit to our board and our shareholders. I
am also pleased that Mike Mayer has joined our board
and is on the slate of directors up for election at this
year’s meeting. Mike has been a great asset to our bank
since joining as its president three years ago. Finally, I
would like to welcome Don Allred and Abby Donnelly
who join us from the board of Carolina Bank.
Accompanying the mailing of this letter is our proxy
statement and the notice of our Annual Shareholders
Meeting, which is being held at Mid-Pines Inn & Golf
Club in Southern Pines at 4:30 PM on Wednesday, May
3, 2017. There is important information regarding your
company contained within the proxy statement, and
I encourage you to read it closely. After addressing
the business of the day, we will have refreshments
available, and we look forward to seeing as many
shareholders as possible.
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
B O A R D O F D I R E C T O R S
Donald H. Allred
Daniel T. Blue, Jr.
Mary Clara Capel
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C H A I R M A N F I R S T B A N C O R P
P R E S I D E N T F I R S T B A N C O R P
James C. Crawford, III
Abby J. Donnelly
Michael G. Mayer
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
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
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
The Annual Meeting will be held on May 3, 2017 at 4:30 PM at
by visiting our corporate website at
Mid-Pines Inn & Golf Club in Southern Pines, North Carolina.
www.LocalFirstBank.com
Common Stock Information
Dividend Reinvestment
First Bancorp’s common stock is traded on the NASDAQ
Registered holders of First Bancorp stock are eligible to
Global Select Market under the symbol FBNC. There were
participate in the Company’s Dividend Reinvestment Plan, a
20,844,505 shares outstanding as of December 31, 2016 with
convenient and economical way to purchase additional shares
2,100 shareholders of record and approximately 4,100 additional
of First Bancorp common stock without payment of brokerage
shareholders that held their shares in “street name.”
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
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, 2016
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, 2016 as reported by The NASDAQ Global Select Market, was approximately $345,827,000.
The number of shares of the registrant’s Common Stock outstanding on March 14, 2017 was 24,650,076.
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
22
34
34
34
34
Item 5
Market for Registrant’s Common Stock, Related Shareholder Matters, and
35, 76
Issuer Purchases of Equity Securities
Item 6
Item 7
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
37, 76
PART II
Operations
Overview – 2016 Compared to 2015
Overview – 2015 Compared to 2014
Outlook for 2017
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
38
41
43
44
46
46
50, 77
52, 87
53, 78
55, 79
57,79
57
59, 80
59, 80
61, 82
62, 84
64, 86
66, 88
67
68, 90
69, 92
72
73, 91
73, 89
75
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75
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, 2016 and 2015
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2016
Consolidated Statements of Comprehensive Income for each of the years in
the three-year period ended December 31, 2016
Consolidated Statements of Shareholders’ Equity for each of the years in the
97
three-year period ended December 31, 2016
2
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2016
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)
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99
157
76
93
160
160
161
161
161
161
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161
162
166
*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s definitive
Proxy Statement for the 2017 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 2017.
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, 2016 and 2015.
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, 2016,
we conducted business from 88 branches covering a geographical area from Florence, South Carolina to the
south, to Wilmington, North Carolina to the east, to Kill Devil Hills, North Carolina to the northeast, to Mayodan,
North Carolina to the north, and to Asheville, North Carolina to the west. We also have loan production offices
in Greensboro, North Carolina and Raleigh, North Carolina. Of the Bank’s 88 branches, 82 branches are in North
Carolina and six branches are in South Carolina. Ranked by assets, the Bank was the seventh largest bank
headquartered in North Carolina as of December 31, 2016.
As of December 31, 2016, the Bank had three wholly owned subsidiaries, First Bank Insurance Services, Inc.
(“First Bank Insurance”), SBA Complete, Inc. (“SBA Complete”), and First Troy SPE, LLC. First Bank Insurance’s
primary business activity is the placement of property and casualty insurance coverage. SBA Complete is a firm
that specializes in providing consulting services for financial institutions across the country related to Small
4
Business Administration (“SBA”) loan origination and servicing. First Troy SPE, LLC, which was organized in
December 2009, is a holding entity for certain foreclosed properties.
Our principal executive offices are located at 300 SW Broad Street, Southern Pines, North Carolina, 28387, and
our telephone number is (910) 246-2500. Unless the context requires otherwise, references to the “Company,”
“we,” “our,” or “us” in this annual report on Form 10-K shall mean collectively First Bancorp and its consolidated
subsidiaries.
General Business
We engage in a full range of banking activities, with the acceptance of deposits and the making of loans being
our most basic activities. We offer deposit products such as checking, savings, and money market accounts, as
well as time deposits, including various types of certificates of deposits (“CDs”) and individual retirement
accounts (“IRAs”). We provide loans for a wide range of consumer and commercial purposes, including loans for
business, agriculture, real estate, personal uses, home improvement and automobiles. We offer SBA loans to
small business owners across the nation. 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 thousands of ATMs across the country, 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 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.
In 2016, we undertook several initiatives to grow and diversify our sources of noninterest income, which is
discussed in the following three paragraphs.
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. Bankingport had total annual insurance
commissions of approximately $1.2 million compared to our legacy agency operations, which total
approximately $0.8 million.
5
On May 5, 2016, First Bank acquired SBA Complete. SBA Complete is a firm that specializes in providing
consulting services for financial institutions across the country related to SBA loan origination and servicing. SBA
Complete earned $3.2 million in SBA consulting fees from the date of the acquisition through December 31,
2016.
In the third quarter of 2016, we leveraged the expertise of the personnel assumed in the SBA Complete
acquisition and began providing loans guaranteed by the SBA for the purchase of businesses, business startups,
business expansion, equipment, and working capital. Shortly after each origination, we typically sell the
guaranteed portion of the loan for a premium and record the non-guaranteed portion to our loan portfolio.
Since the launch in the third quarter of 2016 through year end, this division originated $24.8 million of SBA loans
and earned $1.4 million from gains on the sales of the guaranteed portions of these loans.
First Bancorp Capital Trust II and First Bancorp Capital Trust III were organized in December 2003 for the
purpose of issuing $20.6 million in debt securities ($10.3 million was issued from each trust). These borrowings
are due on January 23, 2034 and are also structured as trust preferred capital securities in order to qualify as
regulatory capital. These debt securities are callable by the Company at par on any quarterly interest payment
date beginning on January 23, 2009. The interest rate on these debt securities adjusts on a quarterly basis at a
weighted average rate of three-month LIBOR plus 2.70%.
First Bancorp Capital Trust IV was organized in April 2006 for the purpose of issuing $25.8 million in debt
securities. These borrowings are due on June 15, 2036 and are also structured as trust preferred capital
securities that qualify as regulatory capital. These debt securities are callable by the Company at par on any
quarterly interest payment date beginning on June 15, 2011. The interest rate on these debt securities adjusts
on a quarterly basis at a rate of three-month LIBOR plus 1.39%.
6
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 2016, 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. The following table presents, for each county where we
operated as of December 31, 2016, 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, 2016, our approximate
deposit market share at June 30, 2016, and the number of bank competitors located in the county at June 30,
2016.
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
Forsyth, NC
Guilford, NC
Harnett, NC
Iredell, NC
Lee, NC
Mecklenburg, NC
Montgomery, NC
Moore, NC
New Hanover, NC
Onslow, NC
Pitt, NC
Randolph, NC
Richmond, NC
Robeson, NC
Rockingham, NC
Rowan, NC
Scotland, NC
Stanly, NC
Wake, NC
Brokered Deposits
Total
Number of
Branches
1
2
1
4
3
2
2
2
1
2
1
1
2
3
3
2
4
1
3
3
3
2
4
10
5
2
1
3
1
4
1
1
2
4
2
-
88
Deposits
(in millions)
$ 14
48
27
125
90
40
34
53
43
41
13
21
94
63
147
50
56
30
109
77
172
16
117
478
172
63
0
87
46
183
24
61
77
102
38
136
$ 2,947
Market
Share
5.7%
5.0%
9.1%
7.0%
1.8%
1.9%
3.4%
7.9%
11.5%
5.8%
0.3%
2.0%
2.6%
23.1%
20.9%
2.1%
n/a
0.8%
11.1%
1.2%
22.0%
n/a
42.4%
28.0%
3.0%
4.5%
n/a
5.3%
10.9%
19.0%
2.6%
4.2%
21.0%
11.4%
0.1%
Number of
Competitors
4
7
5
11
16
11
8
10
6
5
14
8
10
3
6
12
18
19
9
20
9
25
2
10
18
10
15
12
5
8
10
13
6
6
29
n/a – not applicable as branch was not open at June 30, 2016
Historically, our branches and facilities have been primarily located in small communities whose economies are
based primarily on services, manufacturing and light industries. Although these markets are 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
7
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 recent years, we have implemented a branch strategy of expansion into larger, higher growth markets. In
2016, this expansion continued with additional investments in Charlotte, Raleigh and the Triad area of North
Carolina. Several seasoned bankers joined the Bank and have led our expansion efforts in these markets. We
opened our first full service branch in Charlotte in August 2016, after opening a loan production office there in
2015. In Raleigh, we opened a loan production office early in 2016 and are upgrading our capabilities there with
a full service branch expected to open later in 2017. In the Triad, which includes Greensboro, High Point and
Winston-Salem, experienced bankers joined us in early 2016 as we opened a loan production office in
Greensboro. Our expansion into this market was enhanced by two strategic transactions discussed in the
following paragraphs.
In March 2016, we announced an agreement to exchange our seven Virginia branches, with approximately $151
million in loans and $134 million in deposits, for six North Carolina branches of a community bank with a large
Virginia presence that included approximately $152 million in loans and $111 million in deposits. Four of the six
branches we assumed were in Winston-Salem, with the other two branches located in the Charlotte-metro
markets of Mooresville and Huntersville. The Winston-Salem branches we assumed improved the Triad
expansion initiative, while the Mooresville and Huntersville branches increased our Charlotte expansion. This
transaction, which was completed in July 2016, resulted in our exit from Virginia, which was a good market for
our Bank, but created challenges due to the distant proximity to our core market.
In June 2016, we announced an agreement to acquire Carolina Bank Holdings, Inc. (“Carolina Bank”), the parent
company of Carolina Bank. Carolina Bank is a community bank headquartered in Greensboro with $705 million
in assets, with branches located in Greensboro, Winston-Salem, Burlington and Asheboro. This acquisition
builds on the Winston-Salem expansion previously discussed and significantly accelerates our recent expansion
initiative in the Greensboro market. We completed this transaction on March 3, 2017.
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 near 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
continue to be under competitive pressure. The pricing competition for deposits has lessened in recent years,
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 the loss of some deposits from price-sensitive
8
customers, which has been primarily responsible for the declines in our time deposit accounts that are discussed
below in Management’s Discussion and Analysis of Financial Condition and Results of Operation. It is not yet
known what the competitive impact will be of the recent and expected interest rate increases initiated by the
Board of Governors of the Federal Reserve System (the “Federal Reserve”). 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 with which we compete. 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 five
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
President and Chief Credit Officer have authority to approve loans up to $10,000,000 respectively, while the
Chief Credit Officer and the Bank’s President have joint authority to approve loans up to $25,000,000. The
Bank’s board of directors maintains loan authority in excess of the Bank’s in-house limit, currently $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 the Bank’s in-house limit, 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
9
it serves. Individual lending officers are responsible for monitoring any changes in the financial status of
borrowers and pursuing collection of early-stage past due amounts. For certain types of loans that exceed our
established parameters of past due status, 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,
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
10
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.
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 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.
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 an FDIC-assisted transaction. Cooperative Bank operated through 21 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 an 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.
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.
In May 2016, we completed the acquisition of SBA Complete. SBA Complete is a consulting firm that specializes
in consulting with financial institutions across the country related to SBA loan origination and servicing. Many
11
community banks do not have the in-house capability to comprehensively originate and service those types of
loans, so they contract with SBA Complete for assistance. SBA Complete has 280 bank clients that it serves from
its headquarters in California with 37 employees. SBA Complete generated fees of $3.2 million for our Company
from the May acquisition date through the end of the year. To learn more about this subsidiary of our
Company, please visit www.sbacomplete.com. Information included on our Internet site is not incorporated by
reference into this annual report.
Soon after the acquisition of SBA Complete, we leveraged its capabilities by launching our own SBA loan
origination division. Through a network of specialized First Bank loan officers, this division offers SBA loans to
small business owners throughout the United States. We typically sell the portion of each loan that is
guaranteed by the SBA at a premium and record the non-guaranteed portion to our balance sheet. This division
realized $1.4 million in loan sale gains in the second half of the year. To learn more about this division of our
Bank, please visit www.firstbanksba.com. Information included on our Internet site is not incorporated by
reference into this annual report.
In July 2016, we completed a branch exchange with First Community Bank, headquartered in Bluefield, Virginia.
In the branch exchange transaction, we acquired six of First Community Bank’s branches located in North
Carolina, while concurrently selling seven of our branches in the southwestern area of Virginia to First
Community Bank. 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.
In addition to the acquisitions completed during 2016 discussed above, in June 2016, we announced that we had
reached an agreement to acquire Carolina Bank Holdings, Inc., the parent company of Carolina Bank,
headquartered in Greensboro, North Carolina, with approximately $705 million in assets. Carolina Bank
operates eight branches located in Greensboro, High Point, Burlington, Winston-Salem, and Asheboro, North
Carolina and also operates three mortgage offices in North Carolina. The acquisition is a natural extension of
our recent expansion into these high-growth areas. This transaction was completed on March 3, 2017.
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, 2016, we had 806 full-time and 55 part-time employees. We are not a party to any
collective bargaining agreements, and we consider our employee relations to be good.
12
Supervision and Regulation
As a bank holding company, we are subject to supervision, examination and regulation by the Federal Reserve
and the North Carolina Office of the Commissioner of Banks (the “Commissioner”). The Bank is also subject to
supervision and examination by the Federal Reserve and the Commissioner. For additional information, see
Note 16 to the consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as
amended. The Company is also regulated by the Commissioner under the North Carolina Bank Holding
Company Act of 1984.
A bank holding company is required to file quarterly reports and other information regarding its business
operations and those of its subsidiaries with the Federal Reserve. It is also subject to examination by the Federal
Reserve and is required to obtain Federal Reserve approval prior to making certain acquisitions of other
institutions or voting securities. The Federal Reserve requires the Company to maintain certain levels of capital -
see “Capital Resources and Shareholders’ Equity” under Item 7 below. The Federal Reserve also has the
authority to take enforcement action against any bank holding company that commits any unsafe or unsound
practice, or violates certain laws, regulations or conditions imposed in writing by the Federal Reserve. The
Federal Reserve generally prohibits a bank holding company from declaring or paying a cash dividend that would
impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other
arrangements which might adversely affect a bank holding company’s financial position. Under the Federal
Reserve 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
13
affiliates to ensure compliance with state banking regulations and to assess the safety and soundness of the
Bank. Among other things, the Commissioner regulates the merger and consolidation of state-chartered banks,
the payment of dividends, loans to officers and directors, recordkeeping, types and amounts of loans and
investments, and the establishment of branches. The Commissioner also has cease and desist powers over
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 Federal Reserve regulations, a dividend cannot be paid by the Bank if it would be less
than well-capitalized after the dividend. The Federal Reserve 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 Federal Reserve 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 Federal Reserve 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 Federal Reserve
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”). 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 currently based on average total assets less average tangible equity) and is subject to the rules and
regulations of the FDIC.
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We recognized approximately $2.0 million, $2.4 million, and $4.0 million in FDIC insurance expense in 2016,
2015, and 2014, respectively. FDIC insurance expense includes deposit insurance assessments and Financing
Corporation (“FICO”) assessments related to outstanding FICO bonds. As discussed in more detail below related
to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), on April 26,
2016, the FDIC adopted a final rule that changed the way banks with less than $10 billion in assets are assessed
FDIC insurance once the Deposit Insurance Fund (“DIF”) reaches a ratio of 1.15%. The DIF reached 1.15% at June
30, 2016 and thus the rule was triggered. Accordingly, the Bank’s FDIC insurance expense assessment
methodology changed in the second half of 2016 and resulted in a decrease in the Bank’s FDIC insurance
expense of approximately 25% compared to the prior rate, or $550,000 annually.
Legislative and Regulatory Developments
The most significant recent legislative and regulatory developments impacting the Company 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; and
• 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 Federal Reserve, the Office of Comptroller of the Currency, the FDIC, and the
Consumer Financial Protection Bureau. 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 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. On April 26, 2016, the FDIC adopted
a final rule that would change the way banks with less than $10 billion in assets are assessed FDIC insurance
once the DIF reaches a ratio of 1.15%. It was estimated that the change would lower assessment rates for a
significant majority of banks with less than $10 billion in total assets. The DIF reached 1.15% at June 30, 2016
and thus the rule was triggered. Accordingly, the Bank’s FDIC insurance expense assessment methodology
changed in the second half of 2016. For the Bank, the changes resulted in a decrease in FDIC insurance expense
of approximately 25% compared to the prior rate, or $550,000 annually.
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
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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 19, 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
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 Federal Reserve 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 Federal Reserve 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
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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.
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 affects 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 Federal Reserve, together
with other federal banking agencies, the FDIC, the SEC and the Commodity Futures Trading Commission,
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finalized a regulation to implement the Volcker Rule. 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.
Incentive Compensation. The Dodd-Frank Act requires the federal bank regulators and the SEC to establish joint
regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities
having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer,
employee, director or principal stockholder with excessive compensation, fees, or benefits or that could lead to
material financial loss to the entity. In addition, these regulators must establish regulations or guidelines
requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies
proposed such regulations in April 2011. However, the 2011 proposal was replaced with a new proposal in May
2016, which makes explicit that the involvement of risk management and control personnel includes not only
compliance, risk management and internal audit, but also legal, human resources, accounting, financial
reporting and finance roles responsible for identifying, measuring, monitoring or controlling risk-taking. A final
rule had not been adopted as of December 31, 2016.
In June 2010, the Federal Reserve, along with other bank regulatory agencies, issued a comprehensive final
guidance on incentive compensation policies intended to ensure that the incentive compensation policies of
banking organizations do not undermine the safety and soundness of such organizations by encouraging
excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk
profile of an organization, either individually or as part of a group, is based upon the key principles that a
banking organization’s incentive compensation arrangements should (i) provide incentives that do not
encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be
compatible with effective internal controls and risk management, and (iii) be supported by strong corporate
governance, including active and effective oversight by the organization’s board of directors.
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 established new higher capital ratio
requirements, 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 new capital requirements
applied to all banks, savings associations, bank holding companies with more than $1 billion in total consolidated
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 that had the most effect on the Company and the Bank.
• New and Increased Capital Requirements. The regulations established 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 previous rules which excluded unrealized gains and losses on
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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 increased 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, a 5% Tier I Leverage Ratio, and is not subject to any order or written
directive to meet and maintain a specific capital level for any capital measure.
• Capital Buffer Requirement. In addition to increased capital requirements, depository institutions and
their holding companies are 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 is
being phased in over a four-year period beginning in 2016. The capital buffer requirement effectively
raises the minimum required risk-based capital ratios to 7% Common Equity Tier I Capital, 8.5% Tier I
Capital and 10.5% Total Capital on a fully phased-in basis. The capital buffer requirement for the
Company began 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
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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 previous 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 will continue to 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.
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.
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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. The Company 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.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating
money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially
broadened the scope of United States anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations on financial institutions, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States.
On May 11, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued new anti-money laundering
(“AML”) rules governing corporate entities doing business with banks and other financial institutions that are
subject to the requirements of the USA Patriot Act. The AML rules impose significant due diligence obligations
on financial institutions with respect to opening of new accounts and the monitoring of existing accounts. Under
the AML rules, a financial institution must identify persons owning or controlling 25% or more of a “legal entity,”
whenever the legal entity opens a new account at the bank. The financial institution must also identify an
individual who has substantial management authority at the legal entity, such as a CEO, CFO, or managing
partner. These new AML rules become effective in May 2018.
The AML rules codify within the FinCEN regulations the “pillars” that must be included in a financial institutions
AML compliance program. Regulators previously communicated their expectations with respect to four of these
pillars: (1) the development of internal policies, procedures, and control; (2) the designation of a compliance
officer; (3) the establishment of an ongoing employee training program; and (4) the implementation of an
independent audit function to test programs. The new beneficial ownership requirement establishes a fifth
pillar. Among other things, this new pillar includes the necessity to monitor and update the beneficial ownership
21
of a legal entity, including the need to subject corporate borrowers to due diligence requests from financial
institutions for certifications with respect to their beneficial owners. Failure of a financial institution to maintain
and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of
the relevant laws or regulations, could have serious legal and reputational consequences for the institution,
including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when
regulatory approval is required or to prohibit such transactions even if approval is not required.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries,
nationals and others which are administered by the U.S. Treasury Department Office of Foreign Assets Control
(“OFAC”). Failure to comply with these sanctions could have serious legal and reputational consequences,
including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when
regulatory approval is required or to prohibit such transactions even if approval is not required.
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 primarily 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 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
22
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, 2016 of
$75.0 million. Under generally accepted accounting principles, goodwill is required to be tested for impairment
at least annually and between annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount. The test for goodwill impairment
involves comparing the fair value of a company’s reporting units to their respective carrying values. We have
three reporting units – 1) First Bank with $67.5 million in goodwill, 2) First Bank Insurance with $2.0 million in
goodwill, and 3) SBA activities, including SBA Complete and the SBA lending division, with $5.5 million in
goodwill. The price of our common stock is one of several factors available for estimating the fair value of our
reporting units and is most closely associated with our First Bank reporting unit. 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 a portion of our goodwill is impaired. Accordingly, for this reason or
other reasons that indicate that the goodwill at any of our reporting units is impaired, 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, 2016:
• a new common equity Tier 1 risk-based capital ratio of 5.125% (fully phased-in requirement of 7%);
• a Tier 1 risk-based capital ratio of 6.625% (fully phased-in requirement of 8.5%);
• a total risk-based capital ratio of 8.625% (fully phased-in requirement of 10.5%); and
• a leverage ratio of 4%.
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
23
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
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.
We may issue additional shares of stock or equity derivative securities that will dilute the percentage
ownership interest of existing shareholders and may dilute the book value per share of our common stock and
adversely affect the terms on which we may obtain additional capital.
Our authorized capital includes 40,000,000 shares of common stock and 5,000,000 shares of preferred stock. As
of December 31, 2016, we had 20,844,505 shares of common stock outstanding and had reserved for issuance
59,948 shares underlying options that are or may become exercisable at an average price of $17.18 per share.
In addition, as of December 31, 2016, we had the ability to issue 853,920 shares of common stock pursuant to
options and restricted stock under our existing equity compensation plans and 261,446 contingently issuable
shares that are tied to performance goals associated with a corporate acquisition. Our March 3, 2017
acquisition of Carolina Bank resulted in the issuance of approximately 3,800,000 common shares.
Subject to applicable NASDAQ rules, our board generally has the authority, without action by or vote of the
shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose. Such
corporate purposes could include, among other things, issuances of equity-based incentives under or outside of
our equity compensation plans, issuances of equity in business combination transactions, and issuances of
equity to raise additional capital to support growth or to otherwise strengthen our balance sheet. Any issuance
of additional shares of stock or equity derivative securities will dilute the percentage ownership interest of our
shareholders and may dilute the book value per share of our common stock. Shares we issue in connection with
any such offering will increase the total number of outstanding shares and may dilute the economic and voting
ownership interest of our existing shareholders.
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.
24
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. 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 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
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.
25
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 an Accounting Standards Update related
to a new credit impairment model, the Current Expected Credit Loss ("CECL") model, which requires 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 will 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 will require financial institutions like the
Bank to increase their allowances for loan losses. Moreover, the CECL model will likely create more volatility in
our level of allowance for loan losses.
We may make future acquisitions, which could dilute current shareholders’ stock ownership and expose us to
additional risks.
In accordance with our strategic plan, we evaluate opportunities to acquire other banks and branch locations to
expand the Company. As a result, we may engage in acquisitions and other transactions that could have a
material effect on our operating results and financial condition, including short and long-term liquidity. Our
acquisition activities could require us to issue a significant number of shares of common stock or other securities
and/or to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill
recorded in connection with our potential future acquisitions were determined to be impaired, then we would
be required to recognize a charge against our earnings, which could materially and adversely affect our results
of operations during the period in which the impairment was recognized.
Our acquisition activities could involve a number of additional risks, some of which are described in more detail
elsewhere in this report and include:
·
·
·
the possibility that expected benefits may not materialize in the timeframe expected or at all, or
may be more costly to achieve;
incurring the time and expense associated with identifying and evaluating potential acquisitions and
merger partners and negotiating potential transactions, resulting in management’s attention being
diverted from the operation of our existing business;
using inaccurate estimates and judgments to evaluate credit, operations, management, and market
risks with respect to the target institution or assets;
·
incurring the time and expense required to integrate the operations and personnel of the combined
26
businesses;
·
·
·
·
·
the possibility that we will be unable to successfully implement integration strategies, due to
challenges associated with integrating complex systems, technology, banking centers, and other
assets of the acquired bank in a manner that minimizes any adverse effect on customers, suppliers,
employees, and other constituencies;
the possibility of regulatory approval for the acquisition being delayed, impeded, restrictively
conditioned or denied due to existing or new regulatory issues surrounding the Company, the target
institution or the proposed combined entity as a result of, among other things, issues related to
anti-money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer
protection laws, unfair, deceptive, or abusive acts or practices regulations, or the Community
Reinvestment Act, and the possibility that any such issues associated with the target institution,
which we may or may not be aware of at the time of the acquisition, could impact the combined
entity after completion of the acquisition;
the possibility that the acquisition may not be timely completed, if at all;
creating an adverse short-term effect on our results of operations; and
losing key employees and customers as a result of an acquisition that is poorly received.
If we do not successfully manage these risks, our acquisition activities could have a material adverse effect on
our operating results and financial condition, including short- and long-term liquidity.
Future acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Future acquisitions by the Company, particularly those of financial institutions, are subject to approval by a
variety of federal and state regulatory agencies (collectively, “regulatory approvals”). The process for obtaining
these required regulatory approvals has become substantially more difficult in recent years. Regulatory
approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory
issues we have, or may have, with regulatory agencies, including, without limitation, issues related to
anti-money laundering/Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection
laws, unfair, deceptive, or abusive acts or practices regulations, Community Reinvestment Act issues, and other
similar laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant
acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory
approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential
acquisitions that may result from these factors could have a material adverse effect on our business, and, in
turn, our financial condition and results of operations.
We may be exposed to difficulties in combining the operations of acquired businesses into our own
operations, which may prevent us from achieving the expected benefits from our acquisition activities.
We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our
acquisition activities. Inherent uncertainties exist in integrating the operations of an acquired business. In
addition, the markets and industries in which the Company and our potential acquisition targets operate are
highly competitive. We may lose customers or the customers of acquired entities as a result of an acquisition.
We also may lose key personnel from the acquired entity as a result of an acquisition. We may not discover all
known and unknown factors when examining a company for acquisition during the due diligence period. These
factors could produce unintended and unexpected consequences for us. Undiscovered factors as a result of
acquisition, pursued by non-related third party entities, could bring civil, criminal, and financial liabilities against
us, our management, and the management of those entities acquired. These factors could contribute to the
Company not achieving the expected benefits from its acquisitions within desired time frames.
27
In the normal course of business, we process large volumes of transactions involving millions of dollars. If our
internal controls fail to work as expected, if our systems are used in an unauthorized manner, or if our
employees subvert our internal controls, we could experience significant losses.
We process large volumes of transactions on a daily basis and are exposed to numerous types of operational
risk. Operational risk includes the risk of fraud by persons inside or outside the Company, the execution of
unauthorized transactions by employees, errors relating to transaction processing and systems and breaches of
the internal control system and compliance requirements. This risk also includes potential legal actions that
could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory
standards.
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 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
28
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.
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 or delays in approving 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. 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.
29
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;
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.
In May 2016, we completed the acquisition of SBA Complete. SBA Complete is a consulting firm that specializes
in consulting with financial institutions across the country related to SBA loan origination and servicing. We
leveraged the expertise assumed in the acquisition of SBA Complete to launch our own SBA lending division in
the third quarter of 2016. These are both new lines of business for the Bank with unique operational, control
and accounting risks, which if not properly managed, could result in losses for our Company.
30
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.
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 acquired loans.
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.
31
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
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 our business and its financial condition and results of operations.
32
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.
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. Our
inability to overcome these risks could have a material adverse effect on our business, financial condition and
results of operations.
We are subject to losses due to errors, omissions or fraudulent behavior by our employees, clients,
counterparties or other third parties.
We are exposed to many types of operational risk, including the risk of fraud by employees and third parties,
clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as
third-party service providers to process a large number of increasingly complex transactions. We could be
materially and adversely affected if employees, clients, counterparties or other third parties caused an
operational breakdown or failure, either as a result of human error, fraudulent manipulation or purposeful
damage to any of our operations or systems.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may
rely on information furnished to us by or on behalf of clients and counterparties, including financial statements
and other financial information, which we do not independently verify. We also may rely on representations of
clients and counterparties as to the accuracy and completeness of that information and, with respect to financial
statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients,
we may assume that a client’s audited financial statements conform with U.S. Generally Accepted Accounting
Principles (“GAAP”) and present fairly, in all material respects, the financial condition, results of operations and
cash flows of the client. Our financial condition and results of operations could be negatively affected to the
extent we rely on financial statements that do not comply with GAAP or are materially misleading, any of which
could be caused by errors, omissions, or fraudulent behavior by our employees, clients, counterparties, or other
third parties.
33
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. At December 31, 2016, the Company operated 88
bank branches. The Company owned all of its bank branch premises except 10 branch offices for which the land
and buildings are leased and nine branch offices for which the land is leased but the building is owned. The
Company also leases two loan production offices and five other office locations for administrative functions.
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, 2016.
Item 4. Mine Safety Disclosure
Not applicable.
34
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 2016. 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, 2016, there were
approximately 2,100 shareholders of record and another 3,100 shareholders whose stock is held in “street
name.”
Additional Information Regarding the Registrant’s Equity Compensation Plans
At December 31, 2016, the Company had two equity-based compensation plans. The Company’s 2014 Equity
Plan is the only plan under which new grants of equity-based awards are possible.
The following table presents information as of December 31, 2016 regarding shares of the Company’s stock that
may be issued pursuant to the Company’s equity-based compensation plans. At December 31, 2016, the
Company had no warrants or stock appreciation rights outstanding under any compensation plans.
(a)
(b)
(c)
As of December 31, 2016
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))
59,948
─
59,948
$ 17.18
─
$ 17.18
853,920
─
853,920
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; and (B) the Company’s 2007
Equity Plan, each of which was approved by our shareholders.
35
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the
five-year period commencing December 31, 2011 and ending December 31, 2016, 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, 2011 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, 2016
Total Return Performance
First Bancorp
Russell 2000
SNL Bank $1B-$5B
325
300
275
250
225
200
175
150
125
100
e
u
l
a
V
x
e
d
n
I
75
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
First Bancorp
Russell 2000
SNL Index-Banks between $1
Total Return Index Values (1)
December 31,
2011
$ 100.00
100.00
2012
118.39
116.35
2013
156.88
161.52
2014
177.46
169.43
2015
183.35
161.95
2016
269.73
196.45
billion and $5 billion
100.00
123.31
179.31
187.48
209.86
301.92
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, 2011, reinvestment of dividends, and changes in market values. Total
return index numerical values used in this example are for illustrative purposes only.
36
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, 2016.
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,
2016 to October 31,
2016)
Month #2 (November 1,
2016 to November
30, 2016)
Month #3 (December 1,
2016 to December
31, 2016)
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, 2016.
Item 6. Selected Consolidated Financial Data
Table 1 on page 76 of this report sets forth the selected consolidated financial data for the Company.
37
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 - 2016 Compared to 2015
We reported net income per diluted common share of $1.33 in 2016, a 2.3% increase compared to 2015. The
increased earnings were primarily due to the Company’s growth, with loans increasing 7.6% and deposits
increasing 4.8% year over year.
Financial Highlights
($ 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
2016
2015
Change
$ 123,380
2,109
(2,132)
25,551
106,821
42,133
14,624
27,509
(175)
$ 27,334
119,747
2,008
(2,788)
18,764
98,131
41,160
14,126
27,034
(603)
26,431
$ 1.37
1.33
1.34
1.30
$ 3,614,862
2,710,712
2,947,353
3,362,065
2,518,926
2,811,285
3.0%
5.0%
(23.5%)
36.2%
8.9%
2.4%
3.5%
1.8%
3.4%
2.2%
2.3%
7.5%
7.6%
4.8%
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
0.80%
7.73%
4.03%
0.82%
8.04%
4.13%
The following is a more detailed discussion of our results for 2016 compared to 2015:
For the year ended December 31, 2016, we reported net income available to common shareholders of $27.3
million, or $1.33 per diluted common share, an increase of 3.4% compared to the $26.4 million, or $1.30 per
diluted common share, for the year ended December 31, 2015. The higher earnings were primarily the result of
loan and deposit growth, as well as other initiatives that increased profitability.
Net interest income for the year ended December 31, 2016 amounted to $123.4 million, a 3.0% increase from
the $119.7 million recorded in 2015. The higher net interest income was primarily due to growth in our loans
outstanding. Also, see the section entitled “Net Interest Income” for additional information.
38
Our net interest margin (tax-equivalent net interest income divided by average earning assets) was 4.03% for
2016 compared to 4.13% for 2015. The lower margin in 2016 compared to 2015 was primarily due to lower loan
yields, which have been impacted by the continued low interest rate environment.
We recorded a negative total provision for loan losses (reduction of the allowance for loan losses) on our
covered and non-covered loans of $23,000 in 2016 compared to a negative provision for loan losses of $780,000
in 2015. For periods prior to the third quarter of 2016, our provision for loan losses was calculated separately
between covered loans and non-covered loans, with covered loans being those loans subject to FDIC loss share
agreements. Upon the termination of the FDIC loss share agreements on September 22, 2016, all loans became
classified as non-covered. For the year 2016, the provision for loan losses on non-covered loans did not vary
significantly from 2015, amounting to $2.1 million in 2016 compared to $2.0 million for 2015. For the portion of
the year our loss share agreements were in effect in 2016, we recorded a negative provision for loan losses on
covered loans of $2.1 million compared to a $2.8 million negative provision for loan losses in 2015. The lower
negative provision for loan losses on covered loans in 2016 was due to lower covered loan recoveries.
Our overall provision for loan loss levels have been impacted by continued improvement in asset quality.
Nonperforming assets amounted to $59.1 million at December 31, 2016, a decrease of 33.8% from the $89.3
million one year earlier. Our nonperforming assets to total assets ratio was 1.64% at December 31, 2016
compared to 2.66% at December 31, 2015. Annualized net charge-offs as a percentage of average loans for the
twelve months ended December 31, 2016 was 0.14% compared to 0.46% for 2015.
For the year ended December 31, 2016, noninterest income amounted to $25.6 million compared to $18.8
million for the year ended December 31, 2015. The increases in noninterest income are primarily the result of
the following strategic initiatives:
• On January 1, 2016, we acquired Bankingport, Inc., an insurance agency located in Sanford, North
Carolina, which is primarily responsible for the increases in commissions from financial product sales
in the accompanying tables.
• On May 5, 2016, we completed the acquisition of SBA Complete, a firm that specializes in providing
consulting services for financial institutions across the country related to SBA loan origination and
servicing. We recorded $3.2 million in SBA consulting fees from the date of the acquisition through
December 31, 2016.
•
In the third quarter of 2016, we leveraged the expertise assumed in our SBA Complete acquisition to
launch a national SBA lending division. This division offers SBA loans to small business owners
throughout the United States. Since the launch in the third quarter of 2016, this division originated
$24.8 million of SBA loans and earned $1.4 million from gains on the sales of the guaranteed
portions of these loans.
Partially offsetting the above-noted increases in noninterest income was higher indemnification asset expense in
2016 compared to 2015. Indemnification asset expense relates to write-offs of an indemnification asset
associated with two FDIC loss share agreements. For 2016, the Company recorded $10.3 million in
indemnification asset expense compared to $8.6 million in 2015. The 2016 amount includes a $5.7 million
charge associated with the early termination of the loss share agreements that occurred in September 2016.
Noninterest expenses for the year ended December 31, 2016 amounted to $106.8 million compared to $98.1
million recorded in 2015. The primary reason for the increase was the costs associated with the growth
initiatives previously discussed.
39
Total assets at December 31, 2016 amounted to $3.6 billion, a 7.5% increase from a year earlier. Total loans at
December 31, 2016 amounted to $2.7 billion, a 7.6% increase from a year earlier, and total deposits amounted
to $2.9 billion at December 31, 2016, a 4.8% increase from a year earlier.
The $192 million increase in our loans at December 31, 2016 compared to a year earlier is primarily related to
ongoing internal initiatives to drive loan growth, including our expansion into higher growth markets.
Total deposits increased $136 million at December 31, 2016 compared to December 31, 2015, which was driven
by a $175 million increase, or 8.3%, in checking, money market and savings accounts. Retail time deposits
declined by $99 million, or 15.8%, over this same period, while deposits obtained from brokers increased $60
million, or 78.6%.
For the periods presented until the September 2016 termination of the FDIC loss share agreements, the
Company’s results of operations were significantly affected by FDIC loss share agreements related to two FDIC-
assisted failed bank acquisitions. In the discussion above and in the accompanying tables, the term “covered” is
used to describe assets that were included in FDIC loss share agreements, while the term “non-covered” refers
to the assets not included in a loss share arrangement. As previously discussed, all loss share agreements were
terminated in the third quarter of 2016 and thus the entire loan portfolio is now classified as non-covered.
Certain prior period disclosures will continue to present the breakout of the loan portfolio between covered and
non-covered.
Certain covered loans continued to have an unaccreted discount associated with them at the time of transfer to
non-covered status. Such loans that experience favorable changes in credit quality compared to what was
expected at the acquisition date, including loans that pay off, will continue to result in positive adjustments to
interest income being recorded over the life of the respective loan – also referred to as loan discount accretion.
For periods prior to the termination, because favorable changes in covered assets resulted in lower expected
FDIC claims, and unfavorable changes in covered assets resulted in higher expected FDIC claims, the FDIC
indemnification asset was adjusted to reflect those expectations. The net increase or decrease in the
indemnification asset was reflected within noninterest income, with the net impact being that pretax income
was generally only impacted by 20% of the income or expense associated with provisions for loan losses on
covered loans, discount accretion, and losses from covered foreclosed properties.
40
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
a lower provision 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
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
41
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.
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 covered 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 was 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 experienced success resolving our covered loans, and
property sales along the North Carolina coast were strong, which is where most of the Company’s covered
assets were 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 was associated with the continued winding down of the 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 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%,
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 benefitted our overall cost of funds.
On June 25, 2015, we redeemed $32 million (32,000 shares) of Non-Cumulative Perpetual Preferred Stock,
Series B (“SBLF Stock”) that had been issued to the United States Secretary of the Treasury in September 2011
42
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.
Outlook for 2017
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 and by another 25 basis points in late 2016, long-term interest rates
remain near 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 purchased loan portfolios
wind down. Accordingly, we expect our overall loan yield to remain under pressure. 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 four 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 2016, which brought our
overall allowance for loan loss level down significantly following the elevated amounts we maintained during
and immediately following the recession. In 2017, we expect it is likely that we will record a higher provision for
loan losses than we did in 2016, as we provide for on-going loan charge-offs and expected new loan growth.
We experienced solid loan and deposit growth in 2016. Our local economies are generally improving and in
2016, we also continued to implement our plans to expand into larger and higher growth markets in North
Carolina. Additionally, in the past two years 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 2017.
Consistent with our initiative to expand into larger markets, in June 2016, we announced an agreement to
acquire Carolina Bank Holdings, Inc., headquartered in Greensboro, North Carolina with eight branches and
approximately $705 million in assets. This acquisition will be a natural extension of our recent expansion into
high-growth areas of North Carolina. We closed on this transaction on March 3, 2017. We continue to regularly
seek and evaluate bank and non-bank acquisition opportunities, which could result in the issuance of additional
capital.
Also, on September 22, 2016, we terminated our loss share agreements with the FDIC. As such, we expect our
income statement volatility to decrease in 2017 as it relates to indemnification asset expense. We recorded
$10.3 million, $8.6 million, and $12.8 million of indemnification asset expense in 2016, 2015, and 2014,
respectively. Absent a transaction that would give rise to a new indemnification asset, no indemnification
expense will be recorded in the future.
43
Critical Accounting Policies
The accounting principles we follow and our methods of applying these principles conform with accounting
principles generally accepted in the United States of America and with general practices followed by the banking
industry. Certain of these principles involve a significant amount of judgment and may involve the use of
estimates based on our best assumptions at the time of the estimation. The allowance for loan losses,
intangible assets, and the fair value and discount accretion of acquired loans are three policies we have
identified as being more sensitive in terms of judgments and estimates, taking into account their overall
potential impact to our consolidated financial statements.
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts involved, we have identified the
accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy
critical to our consolidated financial statements. The provision for loan losses charged to operations is an
amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb
losses inherent in the portfolio.
Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates
the appropriate allowance for loan losses. This model has two components. The first component involves the
estimation of losses on individually evaluated “impaired loans.” A loan is considered to be impaired when,
based on current information and events, it is probable we will be unable to collect all amounts due according to
the contractual terms of the 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.”
Purchased loans are recorded at fair value at acquisition date. Therefore, amounts deemed uncollectible at
acquisition date represent a discount to the loan value and 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 and this
accretion is referred to as “loan discount accretion.”
44
Although we use the best information available to make evaluations, future material adjustments may be
necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review our allowance for loan losses. Such agencies may
require us to recognize additions to the allowance based on the examiners’ judgment about information
available to them at the time of their examinations.
For further discussion, see “Nonperforming Assets” and “Summary of Loan Loss Experience” below.
Intangible Assets
Due to the estimation process and the potential materiality of the amounts involved, we have also identified the
accounting for intangible assets as an accounting policy critical to our consolidated financial statements.
When we complete an acquisition transaction, the excess of the purchase price over the amount by which the
fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible
asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount
classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized
over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not
systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a
lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a
higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.
The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch
acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency or a SBA
consulting firm, as we did in 2016, the primary identifiable intangible asset is the value of the acquired customer
list. Determining the amount of identifiable intangible assets and their average lives involves multiple
assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which
involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding
costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each
analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have
generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of
amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists
were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis. For
the SBA consulting firm, the identifiable intangible asset related to the customer list was determined to have a
life of approximately seven years, with amortization occurring on a straight-line basis.
Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the
identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an
annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their
related carrying value, including goodwill. If the carrying value of a reporting unit were ever to exceed its fair
value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis,
exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value
of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a
discounted cash flow analysis would involve the significant use of estimates and assumptions.
In our 2016 goodwill impairment evaluation, we concluded 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
45
future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of
multiple estimates and assumptions, such as those listed above.
Fair Value and Discount Accretion of Acquired Loans
We consider the determination of the initial fair value of acquired loans and the subsequent discount accretion
of the purchased loans to involve a high degree of judgment and complexity. Substantially all of our acquired
loans over the past ten years resulted from FDIC-assisted transactions of two failed banks, thus the initial fair
value of the related FDIC indemnification asset also involved 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. 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
As previously discussed, in January 2016, we acquired an insurance agency in Sanford, North Carolina, and in
May 2016, we acquired a firm specializing in origination and servicing of SBA loans. In July 2016, we exchanged
our seven bank branches located in Virginia to another community bank in return for six of their North Carolina
branches.
See Note 2 to the consolidated financial statements for additional information regarding these acquisitions.
FDIC Indemnification Asset
As previously discussed, on June 19, 2009 and January 21, 2011, we acquired substantially all of the assets and
liabilities of Cooperative Bank and The Bank of Asheville, respectively, in FDIC-assisted transactions. For each
transaction, we entered into two loss share agreements with the FDIC, which provided the Bank significant loss
protection from losses experienced on the loans and foreclosed real estate. Under the Cooperative Bank loss
share agreements, the FDIC covered 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
covered 80% of all covered loan and foreclosed real estate losses. For both transactions, the loss share
reimbursements were applicable for ten years for single family home loans and five years for all other loans.
One of our Cooperative Bank agreements expired on July 1, 2014 and one of The Bank of Asheville agreements
expired on April 1, 2016. On September 22, 2016, we reached a mutual agreement with the FDIC to terminate
all loss share agreements. Under the terms of the agreement, the Bank paid $2.0 million to the FDIC to
terminate all rights and obligations associated with the agreements. As a result, all future losses and recoveries
associated with failed bank assets will be borne solely by the Bank.
In connection with the two FDIC transactions noted above, we recorded an FDIC indemnification asset that
represented payments expected to be received from the FDIC related to the loss share agreements. The
46
carrying value of this receivable at each period end was the sum of: 1) actual claims that were incurred and
were in the process of submission to the FDIC for reimbursement, but were not yet received and 2) our
estimated amount of claimable loan and other real estate losses covered by the agreements multiplied by the
FDIC reimbursement percentage. As a result of the termination of the loss share agreements, we no longer have
an indemnification asset related to these agreements.
At December 31, 2016 and 2015, the FDIC indemnification asset was comprised of the following components:
($ 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
2016
$ ̶
̶
̶
$ ̶
2015
(633)
8,675
397
8,439
Subsequent to the initial recording of the indemnification asset, we recorded adjustments to it as discussed
below, the FDIC indemnification asset was generally adjusted in the following circumstances, with downward
adjustments to the asset resulting in FDIC indemnification asset expense, and upwards adjustments resulting in
FDIC indemnification asset income, or a reduction in collection expense, as discussed below:
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 changed and better
information was obtained about likely losses, some loans had better repayment expectations than we originally
projected and some loans had worse repayment expectations than originally projected. For loans with worse
repayment expectations, we generally recorded provisions for loan losses with corresponding increases to the
FDIC indemnification asset by recording noninterest income (indemnification asset income) in proportion to the
80% reimbursement percentage. In 2014, we recorded provisions for loan losses on covered loans amounting to
$1.7 million that resulted in a corresponding upward adjustment to the FDIC indemnification asset of $1.4
million. We also recorded an additional $1.4 million in provisions for loan losses in 2014 without corresponding
increases to the indemnification asset because we believed certain loan losses would occur after the expiration
of the loss share agreements. In 2015 and 2016, we recorded negative provisions for loan losses on covered
loans as a result of loan recoveries that exceeded charge-offs by $2.3 million and $1.7 million, respectively.
2) Write-downs and losses on foreclosed properties – When we foreclose on delinquent borrowers, we
initially record the foreclosed property at the lower of book or fair value, less costs to sell, (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 properties that frequently result in losses. Each of these situations generally
resulted in the Company recording losses on covered foreclosed properties with a corresponding 80% increase
to the FDIC indemnification asset. If we sold a foreclosed property that resulted in a gain, then we generally
recorded a corresponding decrease to the FDIC indemnification asset to reflect the fact that we had to
reimburse the FDIC 80% of any gains that related to prior claims. In 2016 and 2015, we recorded net gains on
covered foreclosed properties amounting to $0.9 million and $1.0 million, respectively, which resulted in a
downward adjustment to the FDIC indemnification asset of $0.7 million and $0.4 million, respectively. 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.
3) Expenses incurred related to collection activities on covered assets – As a result of our collection efforts,
we incurred expenses such as legal fees, property taxes and appraisal costs. Many of these expenses were
47
reimbursable by the FDIC. These expenses were recorded as “other” noninterest expenses and a corresponding
increase was 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 2016, 2015, and 2014, we incurred $0.4
million, $1.2 million, and $3.1 million, in gross collection expenses related to covered assets, respectively, and
reduced that amount by $0.3 million, $1.2 million, and $3.9 million, in FDIC reimbursements, respectively.
4) Cash transactions with the FDIC related to claims – On at least a quarterly basis, we submitted eligible loss
share claims or recoveries to the FDIC. After reviewing and approving the claims/recoveries, the FDIC wired us
cash or we wired the FDIC cash, which reduced or increased the amount of the FDIC indemnification asset. In
2016, we paid approximately $1.6 million in cash to the FDIC related to recoveries on loss share loans. In 2015
and 2014, we received $6.7 million and $17.7 million in FDIC reimbursements, respectively.
5) Accretion of discount on acquired loans – As noted above, we recorded the acquired loans of the two loss
share 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 were our estimate of the loan losses inherent in the portfolio.
As the credit quality of this portfolio changed and better information was obtained about likely losses, some
loans had better repayment expectations than we originally projected and some loans had 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 became less than the original estimate, our expected reimbursement from the FDIC declined as well.
Accordingly, we generally reduced the FDIC indemnification asset in correlation to the accretion of the loan
discount. Prior to the termination of the loss share agreements, we recorded $2.7 million in discount accretion
in 2016, which resulted in a reduction to the FDIC indemnification asset and indemnification expense of $2.0
million. In 2015 and 2014, we recorded discount accretion of $4.8 million and $16.0 million, respectively, which
resulted in reductions to the FDIC indemnification asset and indemnification expense of $5.6 million and $15.3
million, respectively.
In summary, circumstances that resulted in adjustments to the FDIC indemnification asset were recorded within
the income statement line items noted without consideration of the FDIC loss share agreements. Because
favorable changes in covered assets resulted in lower expected FDIC claims, and unfavorable changes in covered
assets generally resulted in higher expected FDIC claims, the FDIC indemnification asset was adjusted to reflect
those expectations. The net increase or decrease in the indemnification asset was reflected within noninterest
income as indemnification asset income/expense.
The adjustments resulted in volatility within individual income statement line items. Because of the FDIC loss
share agreements and the associated indemnification asset, amounts recorded as provisions for loan losses,
discount accretion, and losses from foreclosed properties generally only impacted pretax income by 20% of
those amounts, due to the corresponding adjustments that were made to the indemnification asset.
48
The following presents a rollforward of the FDIC indemnification asset since the date of the Cooperative Bank
acquisition on June 19, 2009 through the date of termination of the loss share agreements on September 22,
2016.
($ 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
Increase (decrease) related to unfavorable (favorable) changes in loss estimates
Increase related to reimbursable expenses
Cash paid
Amortization associated with accretion of loan discount
Other
Write-off of asset balance upon termination of FDIC loss share agreements
Balance at December 31, 2016
49
$ 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
(2,246)
205
1,554
(2,005)
(236)
(5,711)
$ ̶
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 $123.4 million in 2016, $119.7 million in 2015, and $131.6
million in 2014. 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 $125.4 million in 2016, $121.4 million in 2015, and
$133.1 million in 2014. Management believes that analysis of net interest income on a tax-equivalent basis is
useful and appropriate because it allows a comparison of net interest amounts in different periods without
taking into account the different mix of taxable versus non-taxable investments that may have existed during
those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest
income.
($ in thousands)
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
2016
$ 123,380
2,054
$ 125,434
Year ended December 31,
2015
119,747
1,634
121,381
2014
131,609
1,502
133,111
Table 2 analyzes net interest income on a tax-equivalent basis. Our net interest income on a tax-equivalent
basis increased by 3.3% in 2016 and decreased by 8.8% in 2015. There are two primary factors that cause
changes in the amount of net interest income we record – 1) changes in our loans and deposits balances and 2)
our net interest margin. “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 dividing tax-equivalent net interest income by
average earning assets.
The increase in net interest income in 2016 compared to 2015 was primarily due to growth in our loans
outstanding, the positive impact of which was partially offset by a 10 basis point decline in our net interest
margin. The decrease in net interest income in 2015 compared to 2014 was due to a lower net interest margin
caused primarily by lower loan discount accretion, as average loans and deposits were approximately the same
for those years.
For 2016 average loans increased $168.7 million, or 6.9%, with interest income earned on loans increasing by
$3.4 million over 2015, while average deposits also had good growth at 5.2% For 2015, average loans
outstanding amounted to $2.43 billion, unchanged from 2014, while average deposits declined slightly by 1.3%.
Our net interest margin declined from 4.58% in 2014 to 4.13% in 2015 to 4.03% in 2016. Lower asset yields have
been the primary factor causing the decline in the net interest margin. From 2014 to 2016, the yield we earned
on our interest-earning assets declined from 4.86% in 2014 to 4.37% in 2015 to 4.28% in 2016. Steadily
declining loan yields caused by the continued low interest rate environment and competition for loans have
played a factor in this decline. Additionally in comparing 2014 to 2015, a significant factor in the lower loan
yields was a lower amount of loan discount accretion on purchased loans purchased (see discussion below).
The declines in asset yields were partially offset by lower liability costs, as we have been able to progressively
50
lower interest rates on maturing time deposits that were originated in prior periods. The average interest rate
paid on our interest bearing deposits declined from 0.32% in 2014 to 0.26% in 2015 to 0.24% in 2016. Also,
shifts in the funding mix of our liabilities have 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 $1.8 billion
in 2014 to $2.2 billion in 2016, an increase of 20%, while the average amount of our higher cost funding,
comprised of time deposits, decreased from $0.9 billion to $0.7 billion over that same period, a decline of 28%.
The net interest margin for all periods benefited, by varying amounts, from the net accretion of purchase
accounting premiums/discounts associated with acquisitions, primarily the Cooperative Bank acquisition in June
2009 and The Bank of Asheville acquisition in January 2011. As can be seen in the table below, we recorded $4.5
million in 2016, $4.8 million in 2015, and $15.9 million in 2014, in net accretion of purchase accounting
premiums/discounts that increased net interest income.
($ in thousands)
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Year Ended
December 31,
2014
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
$ −
4,451
77
$ 4,528
−
4,751
−
4,751
(98)
16,009
7
15,918
The biggest component of the purchase accounting adjustments in each year was loan discount accretion, which
amounted to $4.5 million in 2016, $4.8 million in 2015, and $16.0 million in 2014. In 2016, 2015 and 2014, lower
amounts of remaining unaccreted loan discount resulted in lower amounts of loan discount accretion –
unaccreted loan discount has declined from $39.6 million at January 1, 2014 to $12.7 million at December 31,
2016. 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 2015 and 2016. For 2016, higher
loan volume positively impacted interest income by $8.0 million, while lower loan interest rates negatively
impacted interest income by $4.6 million, with the net effect driving the total increase in interest income of $4.8
million. A higher level of borrowings in 2016 was the primary factor causing the $0.7 million increase in interest
expense. The higher level of borrowings was necessary in 2016 in order to fund the loan growth, which
outpaced deposit growth. Overall, as the table indicates, net interest income on a tax-equivalent basis grew
$4.1 million in 2016.
For 2015, Table 3 shows that changes in loan rates reduced interest income by $15.8 million, with $11.3 million
of that decrease being the lower loan discount accretion discussed above. A $2.7 million positive impact of
having a higher volume of taxable securities partially offset the lower loan interest income, which resulted in
2015 having an interest income decline of $13.0 million. Lower volumes and lower rates paid on deposits drove
a decline of $1.3 million in interest expense, which, overall, resulted in tax-equivalent net interest income
declining by $11.7 million in 2015 compared to 2014.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
51
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 2016 and 2015, we recorded total negative provisions for loan losses (reduction of allowance for loan losses)
of $23,000 and $780,000, respectively. For 2014, our total provisions for loan losses were $10.2 million. 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.
For periods prior to the third quarter 2016 termination of our loss share agreements, we computed and
presented the provision for loan losses related to covered loans separately from that of our non-covered loans.
Generally, we had recorded provisions for loan losses on non-covered loans as a result of net charge-offs and
loan growth, while significant recoveries in our previously covered loan portfolios resulted in negative provisions
for loan losses. Upon the termination of the loss share agreements, all loans became classified as non-covered
and the allowance for loan losses balances were combined into a single amount and no longer computed
separately.
We recorded $2.1 million, $2.0 million, and $7.1 million in provisions for loan losses related to non-covered
loans for the years ended December 31, 2016, 2015, and 2014, respectively. In 2015, a prolonged period of
stable and improving loan quality trends resulted in lower provision for loan losses that was needed to adjust
our allowance for loan losses to the appropriate amount. This was because our allowance for loan loss model
utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the
current allowance for loan losses that is necessary. Thus, older years (and parts thereof) systematically age out
and are excluded from the analysis as time goes on. In 2015, periods of high net charge-offs we experienced
during the peak of the recession dropped out of the analysis and were replaced by the more modest levels of
net charge-offs recently experienced. This had the impact of bringing 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 and was the primary reason for the provision for loan losses on non-covered loans
declining from $7.1 million in 2014 to $2.0 million in 2015. This same situation continued in 2016 and was
further impacted by net charge-offs that declined significantly. These factors combined to result in a provision
for non-covered loan losses that increased only slightly to $2.1 million in 2016 despite higher loan growth. The
factors just noted resulted in our non-covered allowance for loan losses to total loans ratio declining from 1.69%
at December 31, 2014 to 1.11% at December 31, 2015 to 0.88% at December 31, 2016. In 2017, it is likely that
we will record a higher amount of provision for loan losses than we did in 2015 and 2016, as we provide for on-
going loan charge-offs and expected new loan growth.
As it relates to covered loans, we recorded a negative provision for loan losses (reduction of allowance for loan
losses) of $2.1 million in 2016 and $2.8 million in 2015 and a provision for loan losses of $3.1 million in 2014.
The negative provisions in 2015 and 2016 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 $1.7 million in 2016 and $2.3 million in 2015. We recorded provisions for loan
losses on covered loans of $3.1 million during 2014 to provide for loans that showed signs of collection problems
during the year, as well as to provide for collateral dependent nonaccrual loans for which we received updated
appraisals during the year that reflected lower collateral valuations.
Total net charge-offs (covered and non-covered) for the years ended December 31, 2016, 2015, and 2014, were
$3.7 million, $11.3 million, and $18.1 million, respectively.
52
Net-charge offs of non-covered loans were $5.4 million, $13.6 million, and $14.7 million for 2016, 2015, and
2014, 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 ($1.7 million), ($2.3 million), and $3.3 million in 2016, 2015,
and 2014, respectively, with several large recoveries significantly impacting 2015 and 2016.
As seen in Table 14, in 2016 and 2015, net charge-offs were highest in our residential first mortgages, which is
reflective of these loans comprising approximately 30% of our total loans, as well as continued challenging
economic conditions in some of our more rural market areas. In 2012-2014, 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 $25.6 million in 2016, $18.8 million in 2015, and $14.4 million in 2014.
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 $35.0 million in 2016, a 19.3% increase from the $29.3 million
recorded in 2015. The 2015 core noninterest income of $29.3 million was a 3.8% decrease from the $30.5
million recorded in 2014.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
Service charges on deposit accounts amounted to $10.6 million, $11.6 million, and $13.7 million in 2016, 2015
and 2014, respectively. In 2016 and 2015, fewer instances of fees earned from customers overdrawing their
accounts have impacted this line item, as well as more customers meeting the requirements to have the
monthly services charges waived on their checking accounts.
Other service charges, commissions and fees amounted to $11.9 million in 2016, a 9.2% increase from the $10.9
million earned in 2015. The 2015 amount of $10.9 million was 8.9% higher than the $10.0 million earned in
2014. This category of noninterest income includes items such as electronic payment processing revenue (which
includes fees related to credit card transactions by merchants and customers and fees earned from debit card
transactions), ATM charges, safety deposit box rentals, fees from sales of personalized checks, and check cashing
fees. The growth in this category for both years was primarily attributable to increased debit card usage by our
customers, as we earn a small fee each time our customers make a debit card transaction. 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.
53
Fees from presold mortgages amounted to $2.0 million in 2016, $2.5 million in 2015, and $2.7 million in 2014.
Fewer mortgage loan originations resulted in decreases in these fees in 2016 and 2015. Also, fewer mortgage
loans were sold to the secondary market in 2016 and 2015 compared to 2014 due to our decision to hold more
loans for investment in order to offset declines in our residential mortgage loan portfolio.
Commissions from sales of insurance and financial products amounted to $3.8 million in 2016, $2.6 million in
2015, and $2.7 million in 2014. This line item includes commissions we receive from three sources - 1) sales of
credit life insurance associated with new loans, 2) commissions from the sales of investment, annuity, and long
term care insurance products, and 3) commissions from the sale of property and casualty insurance. The
following table presents the contribution of each of the three sources to the total amount recognized in this line
item:
($ 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,
2016
2015
2014
$ 15
26
43
2,027
1,748
$ 3,790
1,934
620
2,580
2,028
662
2,733
As can be seen in the above table, sales of property and casualty insurance increased significantly in 2016
compared to 2015, which is due to our January 1, 2016 acquisition of Bankingport, Inc., an insurance agency
located in Sanford, North Carolina (see Note 2 to the consolidated financial statements for additional
information). Sales of investments, annuities and long term care insurance did not vary significantly among the
years presented.
The largest reason for the increases in core noninterest income in 2016 was the addition of SBA consulting fees
and SBA loan sale gains during the last half of 2016. As previously discussed, on May 5, 2016, we completed the
acquisition of a firm that specializes in consulting with financial institutions across the country related to SBA
loan origination and servicing (see Note 2 to the consolidated financial statements for additional information).
We recorded $3.2 million in SBA consulting fees related to this business from the date of the acquisition through
December 31, 2016. In the third quarter of 2016, we leveraged the expertise we gained from personnel
assumed in the SBA Complete acquisition and launched a national SBA lending division offering SBA loans to
small business owners throughout the United States. The SBA division originated $24.8 million in loans in 2016
and earned $1.4 million from gains on the sales of the guaranteed portions of these loans for the year.
Table 4 shows earnings from bank-owned life insurance income were $2.1 million in 2016, $1.7 million in 2015,
and $1.3 million in 2014. In the fourth quarters of 2015 and 2014, we purchased $15.0 million and $10.0 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 $9.4
million in 2016, $10.6 million in 2015, and $16.1 million in 2014. 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 $1.5 million in 2016, $2.5 million in 2015, and
$1.9 million in 2014. These losses have resulted from ongoing declines in property values for certain types of
properties. Additionally, in order to dispose of certain of our foreclosed properties that we held for an extended
period of time, it became necessary to accept sales offers that resulted in losses.
54
We recorded $0.9 million and $1.0 million of net gains on covered foreclosed properties in 2016 and 2015,
respectively, and $1.9 million of net losses on covered foreclosed properties in 2014. Most of our covered
foreclosed properties were along the coast of North Carolina. The market value for properties in that area
recovered significantly following the recession and resulted in the gains experienced in 2015 and 2016.
Indemnification asset expense amounted to $10.3 million, $8.6 million, and $12.8 million, for the years ended
December 31, 2016, 2015, and 2014, respectively. Historically, indemnification asset income (expense) was
recorded to reflect additional (or decreased) amounts that were expected to be received from the FDIC during
the period related to covered assets. The three primary items that resulted in recording indemnification asset
income (expense) were 1) loan discount accretion resulting from improved borrower repayment prospects,
which generally resulted in indemnification expense, 2) provisions (reversals) for loan losses on covered loans,
which resulted in indemnification income (expense) and 3) foreclosed property gains (losses) on covered assets,
which resulted in indemnification expense (income). Lower indemnification asset expense realized in 2015
compared to 2014 was primarily correlated with the significantly lower loan discount accretion income recorded
in 2015. The higher indemnification asset expense in 2016 resulted from the write-off of the remaining
indemnification asset of $5.7 million when we terminated the FDIC loss share agreements. The following table
presents the sources of indemnification income (expense) for the periods noted.
($ 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)
Indemnification asset expense associated with termination of loss share agreements
Other sources of indemnification asset income (expense)
Total indemnification asset income (expense)
For the year ended December 31,
2015
2014
2016
(5.6)
(2.3)
(0.4)
̶
(0.3)
(8.6)
$ (2.0)
(1.6)
(0.7)
(5.7)
(0.3)
$ (10.3)
1.4
1.5
̶
(0.4)
(12.8)
(15.3)
Securities gains (losses) were insignificant for 2016 and 2015. We recorded $0.8 million in securities gains
during 2014, related to sales of $47.5 million in available for sale securities.
In 2016, we recorded a $1.5 million gain in the branch exchange with First Community Bank (see Note 2 of the
consolidated financial statements for additional discussion). In 2015, “Other gains (losses)” was primarily
comprised of a $0.4 million write-off of an FDIC loss share claim associated with a dispute settlement, whereas
in 2014, the net loss was caused primarily by write-downs and losses on sales of vacated branch buildings.
Noninterest Expenses
Total noninterest expenses totaled $106.8 million, $98.1 million, and $97.3 million for 2016, 2015 and 2014,
respectively. Table 5 presents the components of our noninterest expense during the past three years. The
primary reason for the growth in noninterest expense in 2016 was associated with our growth initiatives,
including acquisitions and market expansion. Line items with the largest fluctuations are further discussed
below.
Total personnel expense increased from $56.8 million in 2015 to $62.1 million in 2016, an increase of $5.3
million, or 9.3%. Within personnel expense, salaries expense increased $3.6 million in 2016 and employee
benefits expense increased by $1.7 million in 2016. The primary reason for these increases in personnel
expense is the aforementioned growth initiatives in 2016, including acquisitions of an insurance agency and an
SBA consulting firm, as well as the creation of an SBA lending division and our expansion into Greensboro,
Raleigh and Charlotte, all in North Carolina.
Total personnel expense increased from $55.2 million in 2014 to $56.8 million in 2015, an increase of $1.6
55
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.
Net occupancy expenses amounted to $7.8 million in 2016, $7.4 million in 2015, and $7.4 million in 2014. The
increases in 2016 were related to the aforementioned acquisitions and expansion initiatives.
Equipment related expenses remained relatively stable over the past three years, amounting to $3.6 million,
$3.7 million, and $3.9 million, in 2016, 2015, and 2014, respectively.
Merger and acquisition expenses amounted to $1.4 million in 2016 compared to none in 2015 and 2014. The
2016 amount was primarily comprised of professional fees incurred in our acquisitions of Bankingport and SBA
Complete, our branch exchange, and our agreement to acquire Carolina Bank.
Intangible amortization expense increased from $0.7-0.8 million in 2014 and 2015 to $1.2 million in 2016. The
increase was due to the additional amortizable intangible assets recorded in connection with the acquisitions of
Bankingport and SBA Complete and the branch exchange transaction with First Community Bank.
FDIC insurance expense amounted to $2.0 million in 2016, $2.4 million in 2015, and $4.0 million in 2014. The
insurance premium rate charged by the FDIC is based on several variable factors that can result in fluctuations
from year to year. As previously discussed, a change in the methodology for assessing banks with $10 billion or
less in total assets was implemented as of July 1, 2016 due to the deposit insurance fund reaching a targeted
minimum level. This change was the biggest factor in the lower expense in 2016.
Collection expenses related to non-covered assets amounted to $2.1-$2.2 million in 2014 and 2015 and declined
to $1.8 million in 2016. With the lower levels of nonperforming assets, we expect this expense to continue to
decline.
Collection expenses on covered assets, net of FDIC reimbursements, amounted to a net expense of $0.1 million
in 2016, and net reimbursements of $0.1 million in 2015 and $0.9 million in 2014. This expense has generally
been low in recent years due to low 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. All loss share agreements
with the FDIC were terminated in 2016, and all collection expenses will be combined for future periods.
Telephone and data line expense amounted to $2.3 million in 2016, $2.1 million in 2015, and $2.0 million in
2014. The higher levels in 2015 and 2016 are due to costs associated with upgrades in the quality of our data
lines at many of our branches.
Legal and audit expense amounted to $1.4 million in 2016, $1.7 million in 2015 and $2.0 million in 2014. The
decrease in 2015 and 2016 is primarily due to the resolution of various legal matters.
Non-credit losses increased from $0.3 million in each of 2014 and 2015, to $1.2 million in 2016. The increase in
2016 is primarily due to higher debit card and credit card fraud losses.
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.
56
Income Taxes
Table 6 presents the components of income tax expense and the related effective tax rates. We recorded
income tax expense of $14.6 million in 2016, $14.1 million in 2015, and $13.5 million in 2014. Our effective tax
rates were 34.7% for 2016, 34.3% for 2015, and 35.1% for 2014. The slight increase in effective tax rate in 2016
was due to nondeductible intangible and merger and acquisition expenses incurred related to corporate
acquisitions and the branch exchange transaction. Excluding those items, our effective tax rate has generally
declined in recent years due to higher amounts of tax-exempt income, primarily bank-owned life insurance
income, and lower statutory income tax rates in North Carolina. North Carolina implemented decreases to its
state income tax rate for corporations from 6.0% in 2014 to 5.0% in 2015 to 4.0% in 2016. The North Carolina
state income tax rate further declines to 3% in 2017.
Stock-Based Compensation
We recorded stock-based compensation expense of $0.7 million, $0.7 million, and $0.3 million, for the years
ended December 31, 2016, 2015, and 2014, respectively. The increase in this expense from 2014 to 2015-2016
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.
57
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
At December 31, 2016, our total assets amounted to $3.6 billion, a 7.5% increase from 2015. As previously
discussed, all FDIC loss share agreements were terminated in September 2016 and, accordingly, assets
previously covered under those agreements become non-covered on that date. The following table presents
detailed information regarding the nature of changes in our loans and deposits in 2015 and 2016:
($ in thousands)
2016
Loans – Non-covered
Loans – Covered
Total loans
Deposits – Noninterest-bearing
Deposits – Interest-bearing checking
Deposits – Money market
Deposits – Savings
Deposits – Brokered time
Deposits – Time >$100,000 – retail
Deposits – Time <$100,000 – retail
Total deposits
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
Balance at
beginning of
period
Internal
growth,
net (1)
Net Impact
of Branch
Exchange (2)
$ 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
$ 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
196,789
(6,517)
190,272
90,807
12,793
55,987
14,263
60,054
(33,164)
(41,751)
158,989
147,705
(24,953)
122,752
98,808
42,975
88,437
6,299
(11,963)
(747)
(54,308)
(54,122)
115,379
1,514
−
1,514
6,158
(4,240)
(8,999)
8,195
−
(8,716)
(15,319)
(22,921)
−
−
−
−
−
−
−
−
−
−
−
−
Transfer due
to Expiration
&
Termination
of Loss
Share
Agreements
Balance at
end of
period
Total
percentage
growth
Internal
percentage
growth (1)
96,124
(96,124)
−
2,710,712
−
2,710,712
12.2%
-100.0%
7.6%
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
756,003
635,431
683,680
209,074
136,466
287,939
238,760
2,947,353
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
14.7%
1.4%
7.4%
12.0%
78.6%
-12.7%
-19.3%
4.8%
6.5%
-19.6%
5.1%
17.6%
7.4%
16.1%
3.5%
-13.5%
-100.0%
-14.1%
-15.5%
4.3%
8.1%
-6.3%
7.6%
13.8%
2.0%
8.8%
7.6%
78.6%
-10.1%
-14.1%
5.7%
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) Excludes the impact of the transfer of loans from covered status to non-covered status on April 1, 2016 due to the expiration of one loss-
sharing agreement and the termination of all remaining loss share agreements on September 22, 2016. Also, excludes the impact of
acquisitions in the year of acquisition, but includes growth or declines in acquired operations after the date of acquisition.
(2) On July 15, 2016, we completed a branch exchange with First Community Bank, headquartered in Bluefield, Virginia. We exchanged our seven
branches in Virginia for six of First Community Bank’s branches in North Carolina, acquiring $152.2 million in loans and $111.3 million in
deposits, while selling $150.6 million in loans and $134.3 million in deposits. This columns represents the net difference in what we received
compared to what we sold.
In 2016, our total loan growth was 7.6%. As derived from the table above, we experienced internal growth in
our non-covered loan portfolio of $196.8 million, or 8.1%. We terminated our FDIC loss share agreements on
September 22, 2016 and thus, all loans were transferred to non-covered status on that date. In 2015, as derived
from the table above, our total loans increased by $122.8 million, or 5.1%. During that period, we experienced
internal growth in our non-covered loan portfolio of $147.7 million, or 6.5%, while our covered loans declined by
$25.0 million, or 19.6%.
58
We expect continued growth in our loan portfolio in 2017, as we have recently expanded into higher growth
market areas, and we had experienced bankers join our Company over the past few years.
During 2016, we experienced a net increase in total deposits of $136.1 million, or 4.8%. Net internal deposit
growth amounted to $159.0 million, or 5.7%, which was partially offset by the impact of our branch exchange in
which we sold $23 million more in deposits than we purchased. Our internal growth arose from significant
growth in our low-cost core deposit accounts (checking, money market and savings), which was partially offset
by declines in our time deposit accounts. We experienced internal growth of $173.9 million in our core deposit
accounts, compared to net declines of $74.9 million in retail time deposits, excluding brokered deposits. Total
brokered deposits amounted to $136.5 million at December 31, 2016, which is a 78.6% increase from the $76.4
million outstanding a year earlier. We increased our holding of brokered deposits in 2016 in order to fund the
strong loan growth experienced.
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 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 all
time deposits.
Our overall liquidity remained stable in 2016 compared to 2015. Our liquid assets (cash and securities) as a
percentage of our total deposits and borrowings was 19.8% at December 31, 2016 compared to 19.7% at
December 31, 2015.
At December 31, 2016, our nonperforming assets to total assets ratio was 1.64% compared to 2.66% at
December 31, 2015. The decrease is primarily due to improved economic conditions, on-going resolution of
nonperforming assets and improving credit quality.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components of our balance sheet at December 31,
2016, 2015, and 2014.
Our balance sheet mix has remained relatively stable over the past three years. On the asset side, there have
been no significant changes, with net loans comprising 73%-74% of total assets and interest-earning assets
ranging from 89%-91%.
On the liability side, as previously discussed, in 2015 and 2016, we experienced shifts from time deposit
categories to our transaction account categories, with noninterest-bearing checking accounts increasing from
17% of total liabilities and shareholders’ equity at December 31, 2014 to 21% at December 31, 2016. We also
obtained additional borrowings in 2015 and 2016 to help fund the loan growth that we experienced during
those years that increased its percentage from 4% to 7%.
Shareholders’ equity decreased from 12% of total liabilities and shareholders’ equity at December 31, 2014 to
10% at December 31, 2015 and 2016 as a result of redeeming $63.5 million in SBLF stock during 2015.
Securities
Information regarding our securities portfolio as of December 31, 2016, 2015, and 2014 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
59
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 $329.0 million, $320.2 million, and $336.7 million at December 31, 2016, 2015, and
2014, respectively. The increase in securities in 2016 was primarily due to purchases of mortgage-backed
securities. The decrease in securities in 2015 was primarily due to normal paydowns, maturities, and calls of
mortgage-backed securities.
The majority of our “government-sponsored enterprise” securities carry one maturity date, often with an issuer
call feature. At December 31, 2016, of the $17.5 million (carrying value) in government-sponsored enterprise
securities, $11.5 million were issued by the Federal Home Loan Bank system, $3.0 million were issued by Freddie
Mac, and the remaining $3.0 million were issued by the Federal Farm Credit Bank system.
Our $228.7 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.
At December 31, 2016, our $33.6 million investment in corporate bonds was comprised of the following:
($ in thousands)
Issuer
Bank of America
Goldman Sachs
JP Morgan Chase
Citigroup
Wells Fargo
Financial Institutions, Inc.
Eagle Bancorp, 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 Agency
Issuer
Ratings
BBB+
BBB+
A-
BBB+
A-
BBB-
BBB
Not Rated
(1)
(1)
(1)
(1)
(1)
(2)
(2)
Maturity Date
Amortized Cost
Fair Value
1/11/2023
1/22/2023
1/25/2023
Various
2/13/2023
4/15/2030
9/1/2024
6/15/2034
$ 7,000
5,108
5,027
6,042
3,100
4,000
2,556
1,000
$ 33,833
6,955
5,054
4,995
6,000
3,053
3,983
2,625
935
33,600
We have concluded that any unrealized losses associated with our corporate bonds are due to interest rate
considerations and not due to credit concerns.
We held $129.7 million in securities held to maturity at December 31, 2016, which had a fair value that
exceeded their carrying value by $0.5 million. Approximately $80.6 million of the securities held to maturity are
mortgage-backed securities that have been issued by either Freddie Mac or Fannie Mae. The remaining $49.1
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.
60
At December 31, 2016, 2015 and 2014, net unrealized losses of $3.1 million, $1.2 million and $0.7 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 $1.1 million, $0.5 million, and $0.3 million) have been reported as part of a
separate component of shareholders’ equity (accumulated other comprehensive income) as of December 31,
2016, 2015, and 2014, respectively.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 2.26% at
December 31, 2016. The expected weighted average life of the available for sale portfolio using the call date for
above-market callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected
life for mortgage-backed securities, was 4.9 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 3.25% at
December 31, 2016. The expected weighted average life of the held to maturity portfolio using the call date for
above-market callable bonds, the expected life for mortgage-backed securities, and the maturity date for all
other securities, was 3.0 years.
The following table provides the names of issuers for which the Company has investment securities totaling in
excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of
December 31, 2016. All of these securities are issued by government sponsored corporations.
($ in thousands)
Issuer
Freddie Mac
Fannie Mae
Small Business Administration
Total
Amortized Cost
$ 79,161
79,105
40,315
$ 198,581
Fair Value
77,789
77,446
39,576
194,811
% of
Shareholders’
Equity
21.5%
21.5%
11.0%
Loans
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. Virtually all of our current loan portfolio is
within our 35 county market area, which is located in western, central and eastern North Carolina 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 in 2009 and The Bank of Asheville in 2011, 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, and accordingly, they were presented as “covered loans.”
Loans that were not subject to the loss share agreements were presented as “non-covered loans.” All loss share
agreements were terminated in 2016 and thus the entire loan portfolio is now classified as non-covered.
61
Certain disclosures will continue to present the historical breakout of the loan portfolio between covered and
non-covered.
In 2016, loans outstanding increased $192.7 million, or 7.6% to $2.7 billion. The growth in 2016 can be
attributed to the recent hiring of experienced lenders, our expansion into high-growth markets, and higher loan
demand associated with a growing and recovering economy. 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.
The majority of our loan portfolio over the years has been real estate mortgage loans, with loans secured by real
estate consistently comprising 89% to 91% of our outstanding loan balances. Except for 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. Residential real estate loans have declined
from 34% of total loans at December 31, 2012 to 28% of total loans at December 31, 2016, 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 39% of all loans at
December 31, 2016. Consistent with our community banking strategy, we have placed emphases on this type of
loan growth and hired a number of experienced community bankers, who have originated a significant amount
of business loans secured by real estate.
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,
2016 mature within one year and 54% of total loans mature within five years. As of December 31, 2016, the
percentages of variable rate loans and fixed rate loans as compared to total performing loans were 35% and
65%, respectively. We intentionally make a blend of fixed and variable rate loans so as to reduce interest rate
risk. The mix of fixed rate loans has generally 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.
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Table 12 summarizes our nonperforming assets at the dates indicated. Prior to September 2016, we presented
nonperforming assets that were subject to the loss share agreements as “covered” and nonperforming assets
that were not subject to the loss share agreements as “non-covered.” Our loss share agreements with the FDIC
were terminated in 2016, and as such, all assets are now presented as a singled “non-covered’ amount.
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. Nonperforming covered assets assumed from two bank failures amounted to an additional
$114 million at September 30, 2012, which resulted in a total of $260 million in nonperforming assets.
Since that time, we have benefited from improving economic conditions and also implemented a combination of
strategies to reduce nonperforming assets including a 2013 loan sale, loan restructurings, discounted payoffs,
and other collection strategies. As a result, we have steadily reduced our level of nonperforming assets over the
years, with nonperforming assets amounting to $59 million at December 31, 2016. At December 31, 2016, the
ratio of nonperforming assets to total assets was 1.64% compared to 2.66% and 3.54% at December 31, 2015
and 2014, respectively.
Table 12a presents our nonperforming assets at December 31, 2016 by general geographic region.
The following is the composition, by loan type, of all of our nonaccrual loans at each period end, as classified for
regulatory purposes:
($ 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,
2016
$ 1,842
2,945
16,017
2,355
4,208
101
$ 27,468
At December 31,
2015 (1)
2,964
4,704
23,829
3,525
12,571
217
47,810
The nonaccrual table above generally indicates that we experienced decreases in all categories of nonaccrual
loans, with the “real estate – mortgage – commercial and other” 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.
At December 31, 2016, there were no covered nonaccrual loans due to the termination of the loss share
agreements. 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
63
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
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 loans that were performing in
accordance with their contractual terms at December 31, 2016 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, 2016 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been
disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not
represent or result from trends or uncertainties that management reasonably expects will materially impact
future operating results, liquidity, or capital resources, or represent material credits about which management is
aware of any information that causes management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
We provide additional information regarding the classification status of our loans in tables contained in Note 4
to our consolidated financial statements. Those tables indicate that from December 31, 2015 to December 31,
2016 our asset quality improved, with total classified and nonaccrual loans decreasing from $125.7 million at
December 31, 2015 to $98.5 million at December 31, 2016. This is consistent with our generally improving asset
quality trends.
Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $9.5
million, $10.0 million, and $12.1 million at December 31, 2016, 2015, and 2014, respectively. Generally, we
have experienced decreases in foreclosed real estate over the past several years primarily due to increased
property sales activity, particularly along the North Carolina coast, which is where a significant portion of our
foreclosed properties are located, and the improvement in our overall asset quality.
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,
2016
$ 3,221
4,345
1,966
$ 9,532
At December 31,
2015 (1)
3,867
3,789
2,338
9,994
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
Allowance for Loan Losses and Loan Loss Experience
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 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
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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 total allowance for loan losses amounted to $23.8 million at December 31, 2016 compared to $28.6 million
at December 31, 2015 and $40.6 million at December 31, 2014. At December 31, 2015 and 2014, $1.8 million
and $2.3 million, respectively, of the total allowance for loan losses was attributable to covered loans.
Our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a
significant component of estimating the current allowance for loan losses that is necessary. Thus, older years
(and parts thereof) systematically age out and are excluded from the analysis as time goes on. In 2015, a
prolonged period of stable and improving loan quality trends following the recession resulted in generally lower
provisions for loan losses that were needed to adjust our allowance for loan losses to the appropriate amount.
This had the impact of bringing our overall allowance for loan loss level on covered loans down to a more
normalized level, amounting to 1.11% at December 31, 2015, following the elevated amounts we maintained
during and immediately following the recession. This was the primary reason for the provision for loan losses on
non-covered loans declining from $7.1 million in 2014 to $2.0 million in 2015. This same situation continued in
2016 and was further impacted by net charge-offs that declined significantly. These factors combined to result
in a provision for non-covered loan losses that increased only slightly to $2.1 million in 2016. When combined
with a negative provision for loan losses for covered loans of $2.1 million for 2016, the total provision for loan
losses was negative $23,000 for the year and the resulting allowance for loan losses declined from $28.6 million
at December 31, 2015 to $23.8 million at December 31, 2016.
The ratio of the total allowance for loan losses to total loans was 0.88%, 1.13%, and 1.70%, as of December 31,
2016, 2015, and 2014, respectively. The decline in this ratio during 2015 and 2016 was the result of the factors
noted above and additionally, in 2016 we removed approximately $1.1 million in allowance for loan losses
associated with loans that were sold in our branch exchange transaction. In 2017, it is likely that we will record a
higher provision for loan losses than we did in 2015 and 2016, as we expect higher net charge-offs, primarily as a
result of lower recoveries, and to provide for expected new loan growth.
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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.
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.
Net loan charge-offs of total loans amounted to $3.7 million in 2016, $11.3 million in 2015, and $18.1 million in
2014. Net loan charge-offs of non-covered loans amounted to $5.4 million in 2016, $13.6 million in 2015, and
$14.7 million in 2014. 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 ($1.7 million), ($2.3 million), and $3.3 million in net charge-offs (recoveries) of covered loans
during 2016, 2015, and 2014, respectively.
Deposits
At December 31, 2016, deposits outstanding amounted to $2.947 billion, an increase of $136 million from the
$2.811 billion at December 31, 2015. During 2016 we experienced strong growth in our noninterest-bearing and
interest-bearing checking accounts, and declines in our higher cost retail time deposits. Total brokered deposits
amounted to $136.5 million at December 31, 2016, which is a 79% increase from the $76.4 million outstanding a
year earlier. The increased usage of brokered deposits was necessary because of loan growth that has exceeded
this deposit growth. This imbalance of growth is largely associated with our recent growth and expansion into
the larger markets of North Carolina – Charlotte, Greensboro and Raleigh. When initially entering markets such
as these, our experience has been that we are able to capture loan market share faster than deposit market
share.
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. Similar to 2016, during 2015 we experienced strong growth in our
noninterest-bearing and interest-bearing checking accounts, and declines in our higher cost time deposits.
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The nature of our deposit growth is illustrated in the table on page 58. 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
Time deposits > $100,000 – retail
Time deposits < $100,000 – retail
Total deposits
2016
26%
21%
23%
7%
5%
10%
8%
100%
2015
23%
22%
23%
7%
3%
12%
10%
100%
2014
21%
22%
20%
7%
3%
14%
13%
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, 2016, 2015, and 2014.
As of December 31, 2016, we held approximately $422.7 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, 2016. This table shows that
74% 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 $271.4 million at December 31, 2016, $186.4 million at December 31, 2015,
and $116.4 million at December 31, 2014. In 2016 and 2015, we obtained new borrowings of $85 million and
$70 million, respectively, from a low cost funding source to help support our loan growth experienced during
the years.
Table 2 shows that average borrowings were $209.7 million in 2016, $149.8 million in 2015, and $99.4 million in
2014.
At December 31, 2016, the Company had three sources of readily available borrowing capacity – 1) an
approximately $707 million line of credit with the FHLB, of which $225 million and $140 million was outstanding
at December 31, 2016 and 2015, respectively, 2) a $35 million federal funds line of credit with a correspondent
bank, of which none was outstanding at December 31, 2016 or 2015, and 3) an approximately $101 million line
of credit through the Federal Reserve Bank of Richmond’s (“FRB”) discount window, of which none was
outstanding at December 31, 2016 or 2015.
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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, 2016, the average amount of FHLB borrowings
outstanding was approximately $163 million with a weighted average interest rate for the year of 0.75%. The
maximum amount of short-term FHLB borrowings outstanding at any month-end during 2016 was $225 million.
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.
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, 2016 and 2015,
as a result of our pledging letters of credit backed by the FHLB for public deposits at each of those dates.
Our correspondent bank relationship allows us to purchase up to $35 million in federal funds on an overnight,
unsecured basis (federal funds purchased). We had no borrowings under this line at December 31, 2016 or
2015. There were no federal funds purchased outstanding at any month-end during 2016 or 2015.
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, 2016, the available line of credit was approximately $101 million. At December 31,
2016 and 2015, we had no borrowings outstanding under this line.
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, 2016 and 2015. 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.
As noted above, in addition to internally generated liquidity sources, at December 31, 2016, we had the ability
to obtain borrowings from the following three sources – 1) an approximately $707 million line of credit with the
FHLB, 2) a $35 million federal funds line with a correspondent bank, and 3) an approximately $101 million line of
credit through the FRB’s discount window.
Our overall liquidity remained stable in 2016 compared to 2015. Our liquid assets (cash and securities) as a
percentage of our total deposits and borrowings amounted to 19.7% at December 31, 2015 to 19.8% at
December 31, 2016.
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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, 2016. Any of our $225 million in outstanding borrowings with the FHLB may be accelerated immediately by
the FHLB in certain circumstances, including material adverse changes in our condition or if our qualifying
collateral is less than the amount required under the terms of the borrowing agreement.
In the normal course of business there are various outstanding commitments and contingent liabilities such as
commitments to extend credit, which are not reflected in the financial statements. The following table presents
a summary of our outstanding loan commitments as of December 31, 2016:
($ 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
$ 139
116
$ 255
Variable Rate
237
256
493
Total
376
372
748
At December 31, 2016 and 2015, we also had $12.7 million and $13.1 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.
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, 2016 amounted to $368.1 million compared to $342.2 million at
December 31, 2015 and $387.7 million at December 31, 2014. The two basic components that typically have the
largest impact on our shareholders’ equity are net income, which increases shareholders’ equity, and dividends
69
declared, which decreases shareholders’ equity. Additionally, any stock issuances (redemptions) can
significantly increase (decrease) shareholders’ equity.
In 2016, the most significant factors that impacted our equity were 1) the $27.5 million net income reported for
2016, which increased equity, 2) common stock dividends declared of $6.5 million, which reduced equity, and 3)
issuances of $5.5 million of common stock in connection with two acquisitions, which increased equity. See the
Consolidated Statements of Shareholders’ Equity within the consolidated financial statements for disclosure of
other less significant items affecting shareholders’ equity.
Also, on December 22, 2016, we exchanged 728,706 shares of preferred stock for the same number of shares of
our common stock, which resulted in $7.3 million in shareholders’ equity shifting from preferred stock to
common stock, but did not affect our total amount of equity. At December 31, 2016, we have no shares of
preferred stock outstanding.
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).
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 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.
At December 31, 2014, 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 2014 and part
of 2015, we paid preferred dividends on that stock at an annual rate of 1%. In June 2015, we redeemed $32.5
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.
70
The Company and the Bank must comply with regulatory capital requirements established by the Federal
Reserve. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s
financial statements.
In 2013, the Federal Reserve 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 CET1 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 Federal Reserve 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:
• 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
current specific guidelines are as follows –
• CET1 Capital Ratio of at least 6.50%;
71
• 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, 2016, 2015, and 2014 – 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, 2016, 2015, and 2014. 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, 2016, our total risk-based capital ratio was
13.36% 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 8.16% at December 31, 2016 compared to 8.13% at December 31, 2015.
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, 2016 and have no current plans to do so.
72
Return on Assets and Equity
Table 20 shows return on average assets (net income available to common shareholders divided by average
total assets), return on average common equity (net income available to common shareholders divided by
average common shareholders’ equity), dividend payout ratio (dividends per share divided by net income per
common share) and shareholders’ equity to assets ratio (average total shareholders’ equity divided by average
total assets) for each of the years in the three-year period ended December 31, 2016.
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 4.03% (realized in 2016) to a high of 4.92% (realized in 2013). Up until
the end of 2015, the prime rate of interest had remained at 3.25% since 2008. In response to Federal Reserve
actions, the prime rate increased to 3.50% on December 17, 2015 and to 3.75% on December 15, 2016. 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, 2016, approximately 75% 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, 2016, 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, 2016, we had $945 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, 2016 are deposits totaling $1.53
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
73
extent of the rate change. In the short-term (less than six months), this results in us being asset-sensitive,
meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a
decrease in interest rates. However, in the twelve-month horizon, the impact of having a higher level of interest-
sensitive liabilities lessens the short-term effects of changes in interest rates.
The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment
in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and
is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-
term interest rates are substantially the same as long-term interest rates. As a result of the prolonged
negative/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 were also able to generally decrease the rates we paid on other
categories of deposits as a result of declining short-term interest rates in the marketplace and an increase in
liquidity that lessened our need to offer premium interest rates. However, as short-term rates approached zero
and with the Federal Reserve increasing short-term interest rates by 25 bps in December 2015 and by another
25 bps in December 2016, it is likely that our funding costs will not decline any further in the foreseeable future.
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 failed banks acquired through FDIC-assisted
transactions. The purchase accounting adjustments related to the premium amortization on loans, deposits and
borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the
loan discount on acquired loans, which amounted to $4.5 million, $4.8 million, and $16.0 million in 2016, 2015,
and 2014, respectively, is less predictable and could be materially different among periods. This is because of
the magnitude of the discounts that were initially recorded ($280 million in total) and the fact that the accretion
being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated
loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining
discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or
improved performance expectations, the remaining discount will be accreted into income on an accelerated
basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of
the payoff. Each of these factors is difficult to predict and susceptible to volatility. However, with the remaining
loan discount on acquired accruing loans having naturally declined since inception, amounting to only $11.3
million at December 31, 2016, we expect that loan discount accretion will continue to decline. If that occurs, our
net interest margin will be negatively impacted.
Based on our most recent interest rate modeling, which assumes either one or two interest rate increases for
2017 (federal funds rate = 0.75%, prime = 3.75%), we project that our net interest margin for 2017 will likely
experience additional compression. We expect loan yields to be stable to down, while we expect that we will
experience pressure to increase our deposit rates.
74
We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign
currency positions. Table 19 presents the expected maturities of our other than trading market risk sensitive
financial instruments. Table 19 also presents the estimated fair values of market risk sensitive instruments as
estimated in accordance with relevant accounting guidance. Our assets and liabilities have estimated fair values
that do not materially differ from their carrying amounts.
See additional discussion regarding net interest income, as well as discussion of the changes in the annual net
interest margin, in the section entitled “Net Interest Income” above.
Inflation
Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed determinable
amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest
rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be
the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that
have large investments in plant and inventories. During periods of high inflation, there are normally
corresponding increases in the money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, general increases in the price of goods and services will result in increased
operating expenses.
Current Accounting Matters
We prepare our consolidated financial statements and related disclosures in conformity with standards
established by, among others, the Financial Accounting Standards Board (the “FASB”). Because the information
needed by users of financial reports is dynamic, the FASB frequently issues new rules and proposes new rules for
companies to apply in reporting their activities. See Note 1(v) 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.”
75
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
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 (1)
Total loans
Allowance for loan losses
Intangible assets
Deposits
Borrowings
Total shareholders’ equity
Selected Average Balances
Assets
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 (1)
Nonperforming assets to total assets at year end
Nonperforming assets to total assets – non-covered (1)
Net charge-offs to average total loans
Nonfinancial Data – number of branches
Nonfinancial Data – number of employees (FTEs)
2016
$ 130,987
7,607
123,380
(23)
123,403
25,551
106,821
42,133
14,624
27,509
(175)
27,334
Year Ended December 31,
2014
2015
2013
126,655
6,908
119,747
(780)
120,527
18,764
98,131
41,160
14,126
27,034
(603)
26,431
139,832
8,223
131,609
10,195
121,414
14,368
97,251
38,531
13,535
24,996
(868)
24,128
147,511
10,985
136,526
30,616
105,910
23,489
96,619
32,780
12,081
20,699
(895)
19,804
2012
152,520
17,320
135,200
79,672
55,528
1,389
97,275
(40,358)
(16,952)
(23,406)
(2,809)
(26,215)
1.37
1.33
1.34
1.30
1.22
1.19
1.01
0.98
(1.54)
(1.54)
$ 0.32
0.32
0.32
0.32
0.32
28.49
17.15
27.14
17.66
13.85
19.92
15.00
18.74
16.96
13.56
19.65
15.55
18.47
16.08
12.63
17.39
11.98
16.62
15.30
11.81
13.40
7.68
12.82
14.51
11.00
$ 3,614,862
2,710,712
−
2,710,712
23,781
79,475
2,947,353
271,394
368,101
$ 3,422,267
2,603,327
3,108,918
2,827,513
2,324,823
360,715
3,362,065
2,416,285
102,641
2,518,926
28,583
67,171
2,811,285
186,394
342,190
3,218,383
2,268,580
127,594
2,396,174
40,626
67,893
2,695,906
116,394
387,699
3,185,070
2,252,885
210,309
2,463,194
48,505
68,669
2,751,019
46,394
371,922
3,230,302
2,434,602
2,936,624
2,687,381
2,218,246
376,287
3,219,915
2,434,331
2,907,098
2,723,758
2,294,330
383,055
3,208,458
2,419,679
2,805,112
2,779,032
2,380,747
362,770
0.80%
7.73%
4.03%
8.16%
91.97%
0.88%
0.88%
1.64%
1.64%
0.14%
88
834
0.82%
8.04%
4.13%
8.13%
89.60%
1.13%
1.11%
2.66%
2.37%
0.46%
88
812
0.75%
7.73%
4.58%
7.90%
88.88%
1.70%
1.69%
3.54%
3.09%
0.74%
87
798
0.62%
6.78%
4.92%
7.46%
89.54%
1.97%
1.96%
4.79%
2.78%
1.18%
96
855
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
2,436,997
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%
97
831
(1) Effective September 22, 2016, all FDIC loss share agreements were terminated, and accordingly, assets previously covered
under those agreements became non-covered on that date.
76
Table 2 Average Balances and Net Interest Income Analysis
2016
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
Year Ended December 31,
2015
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2014
Avg.
Rate
Interest
Earned
or Paid
$ 2,603,327
298,083
49,986
4.66%
2.36%
7.61%
$ 121,322 $ 2,434,602
296,181
52,449
7,034
3,802
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
3,461
3,383
157,522
0.56%
883
153,392
0.43%
658
251,035
0.34%
849
3,108,918
59,835
76,418
177,096
$ 3,422,267
4.28%
133,041
2,936,624
61,212
4.37%
128,289
2,907,098
81,290
4.86%
141,334
75,452
157,014
$ 3,230,302
76,463
155,064
$ 3,219,915
$ 583,786 0.06%
0.18%
0.05%
0.65%
0.33%
657,211
200,093
405,220
268,854
$ 360
1,160
100
2,654
896
$ 568,329
582,407
184,821
410,692
322,205
0.06%
0.13%
0.05%
0.70%
0.39%
$ 335
765
92
2,856
1,271
$ 535,738 0.06%
0.11%
0.05%
0.81%
0.43%
552,940
176,362
542,303
387,607
$ 322
630
88
4,373
1,659
2,115,164
209,659
0.24%
1.16%
5,170
2,437
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
2,324,823
0.33%
7,607
2,218,246
0.31%
6,908
2,294,330
0.36%
8,223
712,349
24,380
360,715
618,927
16,842
376,287
528,808
13,722
383,055
$ 3,422,267
$ 3,230,302
$ 3,219,915
4.03%
$ 125,434
4.13%
$ 121,381
3.95%
3.51%
4.06%
3.26%
$ 133,111
4.58%
4.50%
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 ($457,000), ($39,000), and $143,700 for 2016, 2015, and 2014, respectively.
Includes accretion of discount on covered loans of $4,451,000, $4,751,000, and $16,009,000 in 2016, 2015, and 2014, respectively.
Includes tax-equivalent adjustments of $2,054,000, $1,634,000, and $1,502,000 in 2016, 2015, and 2014, respectively, to reflect the federal and state
tax benefit of the tax-exempt securities (using a 37.6% combined tax rate), reduced by the related nondeductible portion of interest expense.
77
Table 3 Volume and Rate Variance Analysis
($ 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, 2016
Year Ended December 31, 2015
Change Attributable to
Change Attributable to
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$ 8,016
43
(175)
20
7,904
9
115
8
(37)
(194)
(99)
665
566
(4,566)
695
514
205
(3,152)
16
280
−
(165)
(181)
(50)
183
133
3,450
738
339
225
4,752
25
395
8
(202)
(375)
(149)
848
699
14
2,687
(93)
(15,783)
148
173
(15,769)
2,835
80
(375)
2,233
184
(15,278)
(191)
(13,045)
19
36
4
(988)
(269)
(1,198)
559
(639)
(6)
99
−
(529)
(119)
(555)
(121)
(676)
13
135
4
(1,517)
(388)
(1,753)
438
(1,315)
Net interest income (tax-equivalent)
$ 7,338
(3,285)
4,053
2,872
(14,602)
(11,730)
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
SBA consulting fees
SBA loan sale gains
Bank owned life insurance income
Total core noninterest income
Foreclosed property (gains) losses, net – non-covered
Foreclosed property (gains) losses, net – covered
FDIC Indemnification asset income (expense), net
Securities gains (losses), net
Gain on branch exchange transaction
Other gains (losses), net
Total
2016
$ 10,571
11,913
2,033
3,790
3,199
1,433
2,052
34,991
(1,495)
870
(10,255)
3
1,466
(29)
$ 25,551
Year Ended December 31,
2015
11,648
10,906
2,532
2,580
−
−
1,665
29,331
(2,504)
1,018
(8,615)
(1)
−
(465)
18,764
2014
13,706
10,019
2,726
2,733
−
−
1,311
30,495
(1,924)
(1,919)
(12,842)
786
−
(228)
14,368
78
Table 5 Noninterest Expenses
($ in thousands)
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Merger and acquisition expenses
Amortization of intangible assets
Telephone and data lines
Outside consultants
Stationery and supplies
Data processing expense
FDIC insurance expense
Marketing expense
Repossession and collection expenses – non-covered
Repossession and collection expenses – covered, net
of FDIC reimbursements
Dues and subscription expense
Legal and audit
Non-credit losses
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
2016
$ 51,252
10,812
62,064
7,838
3,608
1,431
1,211
2,311
1,700
2,066
2,010
2,009
1,999
1,842
92
1,604
1,408
1,164
−
12,464
$ 106,821
Year Ended December 31,
2015
47,660
9,134
56,794
7,358
3,749
−
722
2,133
1,677
2,039
1,935
2,394
1,674
2,167
(54)
1,710
1,689
360
−
11,784
98,131
2014
46,071
9,086
55,157
7,362
3,931
−
777
1,988
1,663
1,710
1,654
3,988
1,487
2,092
(861)
1,717
1,955
309
976
11,346
97,251
2016
$ 12,827
1,679
16
102
$ 14,624
2015
9,149
1,436
3,205
336
14,126
2014
1,316
903
10,104
1,212
13,535
34.7%
34.3%
35.1%
79
Table 7 Distribution of Assets and Liabilities
2016
As of December 31,
2015
2014
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 $100,000 or more
Other time deposits
Total deposits
Borrowings
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
74%
6
4
6
90
2
2
−
2
−
2
2
100%
21%
17
19
6
12
7
82
7
1
90
10
100%
74%
5
5
7
91
2
2
−
2
−
2
1
100%
20%
19
19
5
12
9
84
5
1
90
10
100%
73%
5
6
5
89
3
2
1
2
−
2
1
100%
17%
18
17
6
15
11
84
4
̶
88
12
100%
Table 8 Securities Portfolio Composition
($ 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
2016
$ 17,490
148,065
33,600
174
199,329
80,585
49,128
129,713
As of December 31,
2015
18,972
121,553
24,946
143
165,614
102,509
52,101
154,610
2014
27,521
129,510
865
122
158,018
124,924
53,763
178,687
Total securities
$ 329,042
320,224
336,705
Average total securities during year
$ 348,069
348,630
221,732
80
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
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,
2016
Book
Value
Fair
Value
Book
Yield (1)
$ 17,497
17,497
148
120,355
24,302
6,196
151,001
28,833
5,000
33,833
83
148
137,852
53,135
11,196
83
$ 202,414
$ 80,585
80,585
2,016
16,256
29,690
1,166
49,128
2,016
96,841
29,690
1,166
$ 129,713
17,490
17,490
149
117,950
23,853
6,113
148,065
28,682
4,918
33,600
174
149
135,440
52,535
11,031
174
199,329
79,283
79,283
2,028
16,767
30,981
1,136
50,912
2,028
96,050
30,981
1,136
130,195
1.94%
1.94%
2.72%
1.88%
2.04%
3.29%
1.96%
3.45%
5.44%
3.74%
1.15%
2.72%
1.89%
2.81%
4.25%
1.15%
2.26%
1.82%
1.82%
5.92%
5.53%
5.66%
4.05%
5.59%
5.92%
2.44%
5.66%
4.05%
3.25%
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 37.6% tax rate.
(2) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment
speeds.
81
Table 10 Loan Portfolio Composition
As of December 31,
2016
2015
2014
2013
2012
% of
Total
Loans
Amount
% of
Total
Loans
Amount
% of
Total
Loans
Amount
Amount
% of
Total
Loans
Amount
% of
Total
Loans
$ 261,813
9%
$ 202,671
8%
$ 160,878
7%
$ 168,469
7%
$ 160,790
7%
354,667
13%
308,969
12%
288,148
12%
305,246
12%
298,458
13%
750,679
28%
768,559
31%
789,871
33%
838,862
34%
815,281
34%
239,105
9%
232,601
9%
223,500
9%
227,907
9%
238,925
10%
1,049,460
39%
957,587
38%
882,127
37%
855,249
35%
789,746
33%
55,037
2,710,761
2%
100%
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%
(49)
$2,710,712
873
$2,518,926
946
$2,396,174
928
$2,463,194
1,324
$2,376,457
($ 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
(fees)
Total loans (1)
(1) Excludes loans held for sale at December 31, 2012
82
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, 2016
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
$ 50,333
44,387
77,165
4.62%
4.78%
5.06%
$ 15,731
34,422
132,276
4.41%
4.25%
4.76%
$ 17,957
36,842
279,449
2.90%
3.02%
3.91%
$ 84,021
115,651
488,890
4.21%
4.06%
4.32%
7,300
4.60%
39,173
4.37%
180,079
3.98%
226,552
4.07%
572
179,757
5.11%
4.85%
23,272
244,874
8.57%
4.97%
5,241
519,568
5.84%
3.86%
29,085
944,199
8.01%
4.33%
22,916
35,915
123,344
3,792
185,967
365,724
27,468
$ 393,192
5.98%
3.69%
5.35%
5.14%
5.10%
4.98%
83,946
13,568
708,549
16,024
822,087
1,066,961
─
$1,066,961
4.09%
4.31%
4.72%
5.17%
4.66%
4.73%
67,992
47,541
607,485
7,973
730,991
1,250,559
─
$1,250,559
2.79%
4.00%
4.16%
8.68%
4.07%
3.98%
174,854
97,024
1,439,378
27,789
1,739,045
2,683,244
27,468
$2,710,712
3.84%
3.93%
4.54%
6.17%
4.46%
4.41%
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in
this table.
83
Table 12 Nonperforming Assets
($ 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
Restructured loans - accruing
Accruing loans >90 days past due
Total covered nonperforming loans
Foreclosed real estate
Total covered nonperforming assets
2016
2015
As of December 31,
2014
2013
2012
$ 27,468
22,138
−
49,606
−
9,532
$ 59,138
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
$ −
−
−
−
−
$ −
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
Total nonperforming assets
$ 59,138
89,293
114,011
152,588
202,351
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
1.83%
3.15%
4.25%
4.70%
4.50%
2.17%
1.64%
3.53%
2.66%
4.73%
3.54%
6.10%
4.79%
8.26%
6.24%
1.83%
2.81%
3.77%
3.09%
2.76%
and non-covered foreclosed real estate
2.17%
3.18%
4.18%
3.62%
5.00%
Non-covered nonperforming assets to total non-covered
assets
1.64%
2.37%
3.09%
2.78%
3.64%
(1) Covered nonperforming assets consisted of assets that were included in loss share agreements with the FDIC. In 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 non-covered status
upon a scheduled expiration of a FDIC loss-share agreement. In 2016, approximately $7.0 million of nonaccrual loans and $1.6 million of foreclosed real
estate were transferred from covered to non-covered status upon expirations/terminations of FDIC loss-share agreements.
84
Table 12a Nonperforming Assets by Geographical Region
($ 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 (2)
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, 2016
Total Nonperforming
Loans
Total Loans
Nonperforming Loans to
Total Loans
$ 13,678
12,300
10,993
1,583
5,771
310
1,646
3,325
–
715,000
818,000
438,000
207,000
282,000
88,000
131,000
13,000
19,000
$ 49,606
2,711,000
1.9%
1.5%
2.5%
0.8%
2.0%
0.4%
1.3%
25.6%
0.0%
1.8%
$ 1,185
2,535
390
344
1,347
1,138
527
2,066
−
$ 9,532
(1) The counties comprising each region are as follows:
Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret
Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake
Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth
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
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg
(2) As part of the terms of the July 2016 branch exchange, loans classified as substandard or below were not exchanged
between the banks.
85
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
2016
2015
As of December 31,
2014
2013
2012
$ 3,829
2,691
4,764
3,790
6,911
8,520
10,013
11,373
4,855
14,103
15,222
1,145
22,887
894
$ 23,781
18,282
1,051
27,887
696
28,583
23,103
1,916
40,450
176
40,626
24,928
2,343
48,657
(152)
48,505
24,554
1,942
45,454
948
46,402
Allowance for loan losses related to covered loans
included above (1)
$ ̶
1,799
2,281
4,242
4,759
(1) During 2016, all FDIC loss share agreements were terminated, and accordingly, there were no covered loans at December 31,
2016.
86
Table 14 Loan Loss and Recovery Experience
($ in thousands)
2016
2015
As of December 31,
2014
2013
2012
Loans outstanding at end of year
$ 2,710,712
2,518,926
2,396,174
2,463,194
2,376,457
Average amount of loans outstanding
$ 2,603,327
2,434,602
2,434,331
2,419,679
2,436,997
Allowance for loan losses, at
beginning of year
Provision for loan losses – non-covered
Provision (reversal) for loan losses - covered
Total 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 removed related to sold loans
Allowance for loan losses, at end of year
Covered net recoveries (charge-offs) included
above (2)
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
$ 28,583
2,109
(2,132)
(23)
28,560
40,626
2,008
(2,788)
(780)
39,846
48,505
7,087
3,108
10,195
58,700
46,402
18,266
12,350
30,616
77,018
41,418
69,993
9,679
79,672
121,090
(2,033)
(1,101)
(3,894)
(1,010)
(1,088)
(1,288)
(10,414)
817
2,690
1,207
(3,039)
(3,616)
(5,145)
(1,117)
(3,103)
(2,411)
(18,431)
934
3,599
678
(5,179)
(4,667)
(5,000)
(6,071)
(10,582)
(28,613)
(4,050)
(4,764)
(15,490)
(1,607)
(4,405)
(1,924)
(23,236)
149
3,363
646
(3,143)
(7,027)
(2,253)
(32,436)
(5,921)
(20,317)
(1,932)
(77,273)
198
777
595
152
1,281
91
279
1,286
406
6,685
(3,729)
(1,050)
$ 23,781
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
$ 1,714
2,306
(3,332)
(12,867)
(10,728)
0.14%
0.88%
6.38x
0.46%
1.13%
2.54x
0.74%
1.70%
2.25x
1.18%
3.06%
1.97%
1.95%
1.70x
0.62x
net charge-offs
-0.62%
-6.93%
56.41%
107.38%
106.67%
Recoveries of loans previously charged-off as a
percent of loans charged-off
64.19%
38.89%
22.22%
12.09%
3.35%
(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 $30.4 million
after the charge-offs were recorded was classified as “Loans held for sale” on the Company’s consolidated balance sheet at
December 31, 2012.
(2) On September 22, 2016, all FDIC loss-share agreements were terminated, and accordingly, assets previously covered under those
agreements became non-covered on that date.
87
Table 15 Average Deposits
($ 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
2016
Year Ended December 31,
2015
2014
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$ 583,786
657,211
200,093
405,220
268,854
2,115,164
712,349
$2,827,513
0.06%
0.18%
0.05%
0.65%
0.33%
0.24%
−
0.18%
$ 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%
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, 2016
Over 6 to 12
Months
Over 12
Months
Total
Time deposits of $100,000 or more
$ 118,073
71,104
122,777
110,733
422,687
88
Table 17 Interest Rate Sensitivity Analysis
Percent of total earning assets
Cumulative percent of total earning assets
32.32%
32.32%
($ 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, 2016
Total Within
12 Months
Over 3 to 12
Months
Over 12
Months
3 Months
or Less
Total
$ 785,315
25,171
11,967
236,464
$ 1,058,917
$ 635,431
685,331
209,074
117,952
78,080
146,394
$ 1,872,262
186,721
25,823
19,210
─
231,754
7.07%
39.40%
─
─
─
193,881
119,760
105,000
418,641
972,036
50,994
31,177
236,464
1,290,671
1,738,676
148,335
98,536
─
1,985,547
2,710,712
199,329
129,713
236,464
3,276,218
39.40%
39.40%
60.60%
100.00%
100.00%
100.00%
635,431
685,331
209,074
311,833
197,840
251,394
2,290,903
─
─
─
110,854
40,987
20,000
171,841
635,431
685,331
209,074
422,687
238,827
271,394
2,462,744
76.02%
17.00%
93.02%
9.21%
100.00%
76.02%
93.02%
93.02%
100.00%
100.00%
$ (813,345)
(813,345)
(186,887)
(1,000,232)
(1,000,232)
(1,000,232)
1,813,706
813,474
813,474
813,474
(24.83%)
(30.53%)
(30.53%)
24.83%
24.83%
56.56%
56.34%
56.34%
133.03%
133.03%
(1) The three months or less category for loans includes $335,866 in adjustable rate loans that have reached their contractual rate floors.
Thus, the interest rates on these loans will not decrease any further. For the majority of these loans, it will take an increase in prime
rate of at least 200 basis points before the loans will reprice higher.
(2) Securities available for sale include government-sponsored enterprise securities, mortgage-backed securities, corporate bonds, and
equity securities. Securities held to maturity include mortgage-backed securities and state and local government securities. For fixed
rate mortgage-backed securities, the principal is assumed to reprice equally over the average life of the underlying security. All other
fixed rate securities are assumed to reprice based on maturity date or call date. Variable rate securities are included in the period in
which they are subject to reprice.
89
Table 18 Contractual Obligations and Other Commercial Commitments
Contractual
Obligations
As of December 31, 2016
Borrowings
Operating leases
Total contractual cash obligations,
excluding deposits
Deposits
Total contractual cash obligations,
Payments Due by Period ($ in thousands)
Total
$ 271,394
7,499
On Demand or
Less
than 1 Year
205,000
1,404
1-3 Years
20,000
2,121
4-5 Years
−̶
1,300
After 5
Years
46,394
2,674
278,893
206,404
22,121
1,300
49,068
2,947,353
2,793,804
103,952
47,860
1,737
including deposits
$ 3,226,246
3,000,208
126,073
49,160
50,805
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial
Commitments
As of December 31, 2016
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
Total
Amounts
Committed
$ 86,578
661,148
12,738
$ 760,464
Less
than 1 Year
1-3 Years
4-5 Years
43,289
266,863
11,956
322,108
43,289
94,838
782
138,909
─
72,362
─
72,362
After 5
Years
─
227,085
─
227,085
90
Table 19 Market Risk Sensitive Instruments
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2016 Occurring in Indicated Year
($ in thousands)
2017
2018
2019
2020
2021
Beyond
Total
Average
Interest
Rate
Estimated
Fair
Value
Due from banks,
interest-bearing
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
$ 234,348
2,116
−
−
−
−
−
−
−
−
−
−
234,348
0.75%
$ 234,348
2,116
4.14%
2,116
65,963
69,075
23,324
81,018
185,967 186,289 191,787 201,122 242,887
56,041
59,766
179,758
$ 671,264 323,258 332,571 315,069 322,252
58,058
55,889
71,006
36,775
730,993
519,570
1,287,338
332,044
1,739,045
944,199
3,251,752
329,351
2.65%
1,724,116
4.46%
923,017
4.33%
3.97% $ 3,212,948
$ 635,431
685,331
209,074
507,965
205,000
−
−
−
−
83,954
20,000
–
$ 2,242,801 103,954
−
−
−
19,998
−
–
19,998
−
−
−
25,442
−
–
25,442
−
−
−
22,418
−
–
22,418
−
−
−
1,737
−
46,394
48,131
635,431
685,331
209,074
661,514
225,000
46,394
2,462,744
$ 635,431
0.05%
685,331
0.19%
209,074
0.05%
659,129
0.52%
224,972
0.80%
2.90%
38,283
0.34% $ 2,452,220
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 37.6% tax rate.
(2) Securities with call dates within 12 months of December 31, 2016 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
2016
For the Year Ended December 31,
2015
2014
Return on average assets
Return on average common equity
Dividend payout ratio – common shares
Average shareholders’ equity to average assets
0.80%
7.73%
23.36%
10.54%
0.82%
8.04%
23.88%
11.65%
0.75%
7.73%
26.23%
11.90%
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
Deductions from Tier I capital
Total Tier I leverage capital
Tier II capital:
Allowable allowance for loan losses
Other Tier II capital
Tier II capital additions
Total capital
2016
(under Basel III)
As of December 31,
2015
(under Basel III)
$ 368,101
̶
(64,496)
342,190
(7,287)
(55,687)
5,107
308,712
̶
45,000
(349)
353,363
3,550
282,766
7,287
45,000
̶
335,053
2014
(pre-Basel III)
387,699
(70,787)
(67,893)
578
249,597
70,787
45,000
̶
365,384
23,781
703
24,484
$ 377,847
28,583
489
29,072
364,125
28,096
--
28,096
393,480
Total risk weighted assets
$ 2,828,118
2,519,193
2,235,143
Adjusted fourth quarter average assets
3,539,363
3,227,166
3,146,409
Risk-based capital ratios:
Common equity Tier I capital to
Tier I risk adjusted assets
Minimum required under Basel III
Fully phased-in minimum under Basel III
Tier I capital to Tier I risk adjusted assets
Minimum required under Basel III
Fully phased-in minimum under Basel III
Total risk-based capital to
Tier II risk-adjusted assets
Minimum required under Basel III
Fully phased-in minimum under Basel III
Leverage capital ratios:
Tier I leverage capital to
adjusted fourth quarter average assets
Minimum required under Basel III
Fully phased-in minimum under Basel III
11.22%
4.50%
7.00%
13.30%
6.00%
8.50%
14.45%
8.00%
10.50%
10.38%
4.00%
4.00%
11.17%
4.50%
7.00%
16.35%
4.00%
8.50%
17.60%
8.00%
10.50%
11.61%
4.00%
4.00%
10.92%
5.125%
7.00%
12.49%
6.625%
8.50%
13.36%
8.625%
10.50%
10.17%
4.00%
4.00%
92
Table 22 Quarterly Financial Summary (Unaudited)
2016
2015
($ 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
$ 33,834
1,997
31,837
544
31,293
̶
31,293
9,473
28,183
12,583
4,228
8,355
̶
32,789
1,901
30,888
534
30,354
̶
30,354
5,157
27,718
7,793
3,115
4,678
(58)
33,896
1,841
32,055
517
31,538
(281)
31,819
5,919
26,147
11,591
3,952
7,639
(59)
32,522
1,868
32,230
1,754
30,654
459
30,195
258
29,937
5,002
24,773
10,166
3,329
6,837
(58)
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
30,093
390
29,703
(164)
29,867
4,529
23,714
10,682
3,694
6,988
(217)
8,355
4,620
7,580
6,779
6,760
6,868
6,032
6,771
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
$ 0.41
0.40
0.08
28.49
19.18
27.14
17.66
13.85
0.23
0.23
0.08
20.33
17.42
19.79
17.78
13.80
0.38
0.37
0.08
21.94
17.15
17.58
17.64
13.80
0.34
0.33
0.08
0.34
0.33
0.08
19.59
17.83
18.85
17.24
13.75
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
18.64
15.00
17.56
16.34
12.90
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
total loans
Nonperforming assets as a percent of
total assets
Net charge-offs as a percent of average
$ 3,539,363
2,683,493
3,214,719
2,905,501
2,380,614
369,037
3,443,737
2,635,707
3,127,219
2,823,255
2,319,008
365,753
3,373,476
2,565,791
3,064,959
2,805,905
2,296,225
358,586
3,332,492
2,528,317
3,028,775
2,775,391
2,303,445
349,484
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
0.94%
9.17%
10.18%
0.53%
5.13%
10.32%
0.90%
8.68%
10.43%
0.82%
7.97%
10.34%
0.82%
7.96%
10.18%
0.84%
8.23%
11.34%
0.76%
7.42%
11.38%
0.86%
8.54%
12.21%
8.16%
8.24%
8.39%
8.46%
8.35%
9.48%
9.47%
10.33%
8.16%
92.36%
8.03%
93.36%
8.18%
91.44%
8.24%
91.10%
8.13%
91.65%
8.27%
91.53%
8.24%
89.58%
8.08%
88.92%
135.04%
3.94%
0.88%
134.85%
3.93%
0.93%
133.48%
4.21%
1.00%
131.49%
4.07%
1.05%
132.03%
4.05%
1.13%
132.78%
4.14%
1.21%
133.06%
4.15%
1.33%
131.69%
4.19%
1.50%
1.83%
2.27%
2.59%
2.83%
3.15%
3.26%
3.63%
3.92%
1.64%
1.98%
2.25%
2.43%
2.66%
2.80%
3.09%
3.26%
total loans
0.12%
0.06%
0.05%
0.35%
0.23%
0.10%
0.80%
0.76%
93
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2016 and 2015
($ 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 $130,195 in 2016 and $157,146 in 2015)
Presold mortgages in process of settlement
Loans – non-covered
Loans – covered by FDIC loss share agreement
Total loans
Total allowance for loan losses
Net loans
Premises and equipment
Accrued interest receivable
FDIC indemnification asset
Goodwill
Other intangible assets
Foreclosed real estate
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)
2016
2015
$ 71,645
234,348
−
305,993
53,285
213,426
557
267,268
199,329
129,713
2,116
2,710,712
−
2,710,712
(23,781)
2,686,931
75,351
9,286
−
75,042
4,433
9,532
74,138
42,998
$ 3,614,862
$ 756,003
635,431
685,331
209,074
422,687
238,827
2,947,353
271,394
539
27,475
3,246,761
165,614
154,610
4,323
2,416,285
102,641
2,518,926
(28,583)
2,490,343
74,559
9,166
8,439
65,835
1,336
9,994
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
Shareholders’ Equity
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Series C, convertible, issued & outstanding: none in 2016 and 728,706 in 2015
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 20,844,505 shares in 2016 and 19,747,509 shares in 2015
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
−
7,287
147,287
225,921
(5,107)
368,101
$ 3,614,862
133,393
205,060
(3,550)
342,190
3,362,065
See accompanying notes to consolidated financial statements.
94
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2016, 2015 and 2014
($ 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
SBA consulting fees
SBA loan sale gains
Bank-owned life insurance income
Foreclosed property losses, net
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
Merger and acquisition 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
2016
2015
2014
$ 121,322
117,872
133,641
7,034
1,748
883
130,987
1,620
2,654
896
2,437
7,607
123,380
2,109
(2,132)
(23)
123,403
10,571
11,913
2,033
3,790
3,199
1,433
2,052
(625)
(10,255)
3
1,437
25,551
51,252
10,812
62,064
7,838
3,608
1,431
1,211
30,669
106,821
42,133
14,624
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
(1,486)
(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
(3,843)
(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
27,509
27,034
24,996
(175)
(603)
(868)
$ 27,334
26,431
24,128
$ 1.37
1.33
1.34
1.30
1.22
1.19
$ 0.32
0.32
0.32
19,964,727
20,732,917
19,767,470
20,499,727
19,699,801
20,434,007
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2016, 2015 and 2014
($ in thousands)
2016
2015
2014
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)
$ 27,509
27,034
24,996
(1,919)
683
(3)
1
(557)
115
202
(79)
(1,557)
(473)
184
1
−
(4,321)
1,685
(79)
31
(2,972)
2,115
(825)
(786)
307
(5,171)
2,017
(221)
86
(2,478)
Comprehensive income
$ 25,952
24,062
22,518
See accompanying notes to consolidated financial statements.
96
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2016, 2015 and 2014
(In thousands)
Preferred
Stock
Common Stock
Shares
Amount
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Share-
holders’
Equity
Balances, January 1, 2014
$ 70,787
19,680
$ 132,099
167,136
1,900
371,922
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)
24,996
70
(6,306)
(868)
363
(2,478)
(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
Net income
Conversion of preferred stock to
common stock
Equity issued pursuant to acquisitions
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)
(7,287)
729
279
23
(6)
7,287
5,509
375
(166)
27,509
(6,473)
(175)
72
889
(1,557)
27,509
−
5,509
375
(166)
(6,473)
(175)
889
(1,557)
Balances, December 31, 2016
$ −
20,845 $ 147,287
225,921
(5,107)
368,101
See accompanying notes to consolidated financial statements.
97
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2016, 2015 and 2014
($ 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
Loan discount accretion
FDIC indemnification asset expense, net
Foreclosed property losses and write-downs, net
Loss (gain) on securities available for sale
Other (gains) losses
Decrease in net deferred loan costs
Depreciation of premises and equipment
Stock-based compensation expense
Amortization of intangible assets
Fees/gains from sales of presold mortgages and SBA loans
Originations of presold mortgages and SBA loans
Proceeds from sales of presold mortgages and SBA loans
Gain on sale of branches
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 maturities/issuer calls of securities available for sale
Proceeds from maturities/issuer calls of securities held to maturity
Proceeds from sales of securities available for sale
Purchases of Federal Reserve and Federal Home Loan Bank stock, net
Purchase of bank-owned life insurance
Net (increase) decrease in loans
(Payments) proceeds related to FDIC loss share agreements
Payment to FDIC for termination of loss share agreements
Proceeds from sales of foreclosed real estate
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Proceeds from branch sale
Net cash paid in acquisitions
Net cash 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 by financing activities
Increase in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
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
98
2016
2015
2014
$ 27,509
27,034
24,996
(23)
3,341
(4,451)
10,255
625
(3)
29
922
4,602
714
1,211
(3,466)
(95,500)
101,148
(1,466)
(120)
(724)
(4)
2,868
47,467
(114,396)
−
76,939
23,368
8
(3,933)
−
(198,589)
(1,554)
(2,012)
7,954
(8,689)
2,025
26,211
(53,640)
(246,308)
158,989
85,000
(6,399)
(233)
−
375
(166)
237,566
(780)
3,247
(4,751)
8,615
1,486
1
465
73
4,494
710
722
(2,532)
(97,118)
101,315
−
(246)
(5,062)
(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
10,195
1,934
(16,009)
12,842
3,843
(786)
228
(17)
4,618
270
777
(2,726)
(101,493)
103,773
−
729
2,164
(193)
2,675
47,820
(66,263)
(125,377)
30,332
453
47,473
(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
38,725
267,268
$ 305,993
14,184
253,084
267,268
29,810
223,274
253,084
$ 7,653
11,791
7,009
13,815
8,416
5,096
8,117
(1,238)
9,009
(288)
12,717
811
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016
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 three wholly owned
subsidiaries that are fully consolidated - First Bank Insurance Services, Inc. (“First Bank Insurance”), SBA
Complete, Inc. (“SBA Complete”), 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. SBA Complete is a firm that specializes in providing consulting services for financial institutions across
the country related to Small Business Administration (“SBA”) loan origination and servicing. 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 a significant amount of 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 are recorded at estimated fair value on their purchase date.
No allowance for loan losses is carried over from the seller or otherwise recorded.
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.
(g) Loans Held for Sale – Beginning in 2016, the Company began providing loans guaranteed by the Small
Business Administration (“SBA”) for the purchase of businesses, business startups, business expansion,
equipment, and working capital. All SBA loans are underwritten and documented as prescribed by the SBA. SBA
loans are generally fully amortizing and have maturity dates and amortizations of up to 25 years. The portion of
SBA loans originated that are guaranteed and intended for sale on the secondary market are classified as held
for sale and are carried at the lower of cost or fair value - there were no such loans held for sale at December 31,
2016. The loan participations are sold and the servicing rights are retained. At the time of the sale, an asset is
recorded for the value of the servicing rights and is amortized over the remaining life of the loan on the effective
interest method. The servicing asset is included in other assets and the amortization of the servicing asset is
included in non-interest expense. Servicing fees are recorded in non-interest income. A gain is recorded for any
premium received in excess of the carrying value of the net assets transferred in the sale and is also included in
non-interest income. The portion of SBA loans that are retained are also adjusted for a retained discount to
reflect the effective interest rate on the retained unguaranteed portion of the loans. The net value of the
retained loans is included in the appropriate loan classification for disclosure purposes. These loans are
primarily commercial real estate or commercial and industrial.
Periodically, the Company originates other types of 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, 2016 or 2015.
(h) 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
101
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, changes in property values, 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.
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.
(i) 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.
(j) 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. During 2016, the Company and the FDIC
mutually agreed to terminate the loss share agreements and the remaining $5.7 million FDIC indemnification
asset was written off and is included in the line “FDIC indemnification asset expense, net” in the accompanying
consolidated statements of income.
(k) 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.
102
(l) 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(r), is subject to
fair value impairment tests on at least an annual basis.
(m) 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.”
(n) 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, 2016 and 2015, the Company’s investments in limited partnerships, LLCs and other privately
held companies totaled $3.1 million and $2.3 million, respectively, and were included in other assets.
(o) Stock Option Plan − At December 31, 2016, the Company had two 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.
(p) 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,
excluding unvested shares of restricted stock. Diluted Earnings Per Common Share is computed by assuming the
issuance of common shares for all potentially dilutive common shares outstanding during the reporting period.
For the years presented, the Company’s potentially dilutive common stock issuances related to unvested shares
of restricted stock and stock option grants under the Company’s equity-based plans and the Company’s Series C
Preferred stock, which was convertible into common stock on a one-for-one ratio. As discussed in Note 19, on
103
December 22, 2016 each outstanding share of the Company’s Series C Preferred stock was exchanged by the
holder for an equal number of shares of common stock.
In computing Diluted Earnings Per Common Share, adjustments are made to the computation of Basic Earnings
Per Common shares, as follows. As it relates to unvested shares of restricted stock, the number of shares added
to the denominator is equal to the number of unvested shares less the assumed number of shares bought back
by the Company in the open market at the average market price with the amount of proceeds being equal to the
average deferred compensation for the reporting period. 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 for the period of time it was outstanding, it is assumed that the preferred stock
was converted to common stock at the beginning of 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, the potentially dilutive
common stock issuance is disregarded.
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted
Earnings Per Common Share:
($ in thousands,
except per share
amounts)
Income
(Numer-
ator)
2016
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2015
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2014
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
$ 27,334
19,964,727
$ 1.37
$ 26,431
19,767,470
$ 1.34
$ 24,128
19,699,801
$ 1.22
175
768,190
233
732,257
233
734,206
$ 27,509
20,732,917
$ 1.33
$ 26,664
20,499,727
$ 1.30
$ 24,361
20,434,007
$ 1.19
For the years ended December 31, 2016, 2015 and 2014, there were 5,000 options, 50,000 options and 93,000
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 the
year ended December 31, 2014, 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.
(q) 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.
104
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 Held for Sale – Fair values are based on third-party dealer quotes for the loans or loans with similar
characteristics.
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.
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, 2016 and 2015, 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.
105
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.
(r) 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.
(s) Comprehensive Income (Loss) − Comprehensive income (loss) is defined as the change in equity during a
period for non-owner transactions and is divided into net income (loss) and other comprehensive income (loss).
Other comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from
earnings under current accounting standards. The components of accumulated other comprehensive income
(loss) for the Company are as follows:
($ in thousands)
Unrealized gain (loss) on securities available for sale
Deferred tax asset (liability)
Net unrealized gain (loss) on securities available for sale
December 31,
2016
$ (3,085)
1,138
(1,947)
December 31,
2015
(1,163)
454
(709)
December 31,
2014
(691)
270
(421)
Additional pension asset (liability)
Deferred tax asset (liability)
Net additional pension asset (liability)
(5,012)
1,852
(3,160)
(4,657)
1,816
(2,841)
(257)
100
(157)
Total accumulated other comprehensive income (loss)
$ (5,107)
(3,550)
(578)
The following table discloses the changes in accumulated other comprehensive income (loss) for the year ended
December 31, 2016 (all amounts are net of tax).
($ in thousands)
Beginning balance at January 1, 2016
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
$ (709)
(1,236)
(2)
(1,238)
Additional
Pension Asset
(Liability)
(2,841)
(442)
123
(319)
Total
(3,550)
(1,678)
121
(1,557)
Ending balance at December 31, 2016
$ (1,947)
(3,160)
(5,107)
106
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)
(t) 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.
(u) Reclassifications − Certain amounts for prior years have been reclassified to conform to the 2016
presentation. The reclassifications had no effect on net income or shareholders’ equity as previously presented,
nor did they materially impact trends in financial information.
(v) Recent Accounting Pronouncements − In May 2014, the Financial Accounting Standards Board (“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 31, 2017. The Company can apply
the guidance using a full retrospective approach or a modified retrospective approach. The Company does not
expect these amendments to 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 were effective for the Company on January 1, 2016 for all stock
awards granted or modified after January 1, 2016. The Company’s adoption of these amendments did not have
a material effect on its financial statements.
In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item,
which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new
guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2)
separately present an extraordinary item on its income statement, net of tax, after income from continuing
operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The
amendments were effective for the Company on January 1, 2016, and did not 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. Specifically, the amendments: (i) modify the
evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or
voting interest entities; (ii) eliminate the presumption that a general partner should consolidate a limited
partnership; (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly
107
those that have fee arrangements and related party relationships; and (iv) provide a scope exception from
consolidation guidance for reporting entities with interests in legal entities that are required to comply with or
operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act
of 1940 for registered money market funds. The amendments were expected to result in the deconsolidation of
many entities. The amendments were effective for the Company on January 1, 2016. The adoption of these
amendments did not have a material effect on the Company’s 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 were effective for the Company on January 1, 2016.
The Company’s adoption of these amendments did not 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 were effective for the Company on January 1, 2016. The Company’s adoption of
these amendments did not have a material effect on its financial statements.
In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards
Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business
combination by eliminating the requirement to retrospectively account for those adjustments. The amendments
were effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015,
with early adoption permitted for financial statements that have not been issued. All entities are required to
apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date.
The amendment was effective for the Company on January 1, 2016 and these amendments did not have a
material effect on its financial statements.
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to
address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This
update is intended to improve the recognition and measurement of financial instruments and it requires an
entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in
other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured
using the fair value option; (iii) present financial assets and financial liabilities by measurement category and
form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an
exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt
securities in combination with other deferred tax assets. The guidance also provides an election to subsequently
measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain
observable price changes and requires a qualitative impairment assessment of such equity investments and
amends certain fair value disclosure requirements. The amendments will be effective for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The Company will apply the
guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year
of adoption. The amendments related to equity securities without readily determinable fair values will be
applied prospectively to equity investments that exist as of the date of adoption of the amendments. The
Company does not expect these amendments to 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 by recording an asset representing its right to use the
underlying asset and recording a liability, which represents the Company’s obligation to make lease payments.
The 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. The
108
Company is evaluating the effect that this new guidance will have on our consolidated financial statements, but
does not expect it will have a material effect on its financial statements.
In March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the
current and potential future diversity in practice related to the derecognition of a prepaid stored-value product
liability. The amendments will be effective for financial statements issued for fiscal years beginning after
December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance
using a modified retrospective transition method by means of a cumulative-effect adjustment to retained
earnings as of the beginning of the fiscal year in which the guidance is effective to each period presented. The
Company does not expect these amendments to have a material effect on its financial statements.
In March 2016, the FASB amended the Investments—Equity Method and Joint Ventures topic of the Accounting
Standards Codification to eliminate the requirement to retroactively adopt the equity method of accounting and
instead apply the equity method of accounting starting with the date it qualifies for that method. The
amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. The Company will apply the guidance prospectively upon their effective date to increases
in the level of ownership interest or degree of influence that result in the adoption of the equity method. The
Company does not expect these amendments to have a material effect on its financial statements.
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting
Standards Codification to clarify the implementation guidance on principal versus agent considerations and
address how an entity should assess whether it is the principal or the agent in contracts that include three or
more parties. The amendments will be effective for the Company for reporting periods beginning after
December 15, 2017. The Company does not expect these amendments to have a material effect on its financial
statements.
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment
award transactions including the income tax consequences, the classification of awards as either equity or
liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas
specific to entities other than public business entities allowing them apply a practical expedient to estimate the
expected term for all awards with performance or service conditions that have certain characteristics and also
allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to
measuring them at intrinsic value. The amendments will be effective for the Company for annual periods
beginning after December 15, 2016 and interim periods within those annual periods. The Company does not
expect these amendments to have a material effect on its financial statements.
In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards
Codification to clarify the guidance related to identifying performance obligations and accounting for licenses of
intellectual property. The amendments will be effective for the Company for reporting periods beginning after
December 15, 2017. The Company does not expect these amendments to have a material effect on its financial
statements.
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards
Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and
transition. The amendments will be effective for the Company for reporting periods beginning after December
15, 2017. The Company does not expect these amendments to have a material effect on its financial
statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses. The guidance requires an
entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate
its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of
109
the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is
expected to result in earlier recognition of credit losses. The guidance also requires new disclosures for financial
assets measured at amortized cost, loans and available-for-sale debt securities. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods
within those fiscal years. Early adoption is permitted. Entities will apply the standard's provisions as a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the
guidance is adopted. The Company is currently evaluating the effect that implementation of the new standard
will have on its financial position, results of operations, and cash flows.
In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification
to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash
flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017,
including interim periods within those years. The Company does not expect these amendments to have a
material effect on its financial statements.
In October 2016, the FASB amended the Consolidation topic of the Accounting Standards Codification to revise
the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest
entity (VIE) should treat indirect interests in the entity held through related parties that are under common
control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The
amendments will be effective for the Company for fiscal years beginning after December 15, 2016 including
interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these
amendments to have a material effect on its financial statements.
In November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards
Codification to clarify how restricted cash is presented and classified in the statement of cash flows. The
amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including
interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these
amendments to have a material effect on its financial statements.
In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding
guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address
concerns that the existing definition of a business has been applied too broadly and has resulted in many
transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The
guidance will be effective for the Company for reporting periods beginning after December 15, 2017. Early
adoption is permitted. The Company does not expect these amendments to have a material effect on its
financial statements.
In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity
Method and Joint Ventures Topics of the Accounting Standards Codification. The ASU incorporates into the
Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect
on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective
upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of
the standards is adopted, however it does not expect these amendments to have a material effect on its
financial position, results of operations or cash flows.
In January 2017, the FASB issued amended the Goodwill and Other Topic of the Accounting Standards
Codification to simplify the accounting for goodwill impairment for public business entities and other entities
that have goodwill reported in their financial statements and have not elected the private company alternative
for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test.
The amount of goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds
110
its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for
the technical corrections will be effective for the Company for reporting periods beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. The Company does not expect these amendments to have a material effect on its
financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies
are not expected to have a material impact on the Company’s financial position, results of operations or cash
flows.
Note 2. Acquisitions
Since January 1, 2016, the Company completed the acquisitions described below. 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 January 1, 2016, First Bank Insurance completed the acquisition of Bankingport, Inc. (“Bankingport”).
The results of Bankingport are included in First Bancorp’s results for the twelve months ended December
31, 2016 beginning on the January 1, 2016 acquisition date.
Bankingport was an insurance agency based in Sanford, North Carolina. This acquisition represented an
opportunity to expand the insurance agency operations into a contiguous and significant banking market
for the Company. Also, this acquisition provided the Company with a larger platform for leveraging
insurance services throughout the Company’s bank branch network. The deal value was $2.2 million and
the transaction was completed on January 1, 2016 with the Company paying $700,000 in cash and issuing
79,012 shares of its common stock, which had a value of approximately $1.5 million. In connection with
the acquisition, the Company also paid $1.1 million to purchase the office space previously leased by
Bankingport.
This acquisition has been accounted for using the purchase method of accounting for business
combinations, and accordingly, the assets and liabilities of Bankingport were recorded based on estimates
of fair values as of January 1, 2016. In connection with this transaction, the Company recorded $1.7
million in goodwill, which is non-deductible for tax purposes, and $0.7 million in other amortizable
intangible assets.
(2) On May 5, 2016, the Company completed the acquisition of SBA Complete. The results of SBA Complete
are included in First Bancorp’s results for the twelve months ended December 31, 2016 beginning on the
May 5, 2016 acquisition date. SBA Complete is a consulting firm that specializes in consulting with
financial institutions across the country related to SBA loan origination and servicing. The deal value was
approximately $8.5 million with the Company paying $1.5 million in cash and issuing 199,829 shares of its
common stock, which had a value of approximately $4.0 million. Per the terms of the agreement, the
Company has also recorded an earn-out liability valued at $3.0 million, which will be paid in shares of
Company stock in annual distributions over a three-year period if pre-determined goals are met for those
three years.
This acquisition has been accounted for using the purchase method of accounting for business
combinations, and accordingly, the assets and liabilities of SBA Complete were recorded based on
estimates of fair values, which according to applicable accounting guidance, are subject to change for
twelve months following the acquisition. In connection with this transaction, the Company recorded $5.6
million in goodwill, which is non-deductible for tax purposes, and $2.0 million in other amortizable
intangible assets.
111
(3) On July 15, 2016, the Company completed a branch exchange with First Community Bank headquartered
in Bluefield, Virginia. In the branch exchange transaction, the Bank acquired six of First Community
Bank’s branches located in North Carolina, while concurrently selling seven of its branches in the
southwestern area of Virginia to First Community Bank.
In connection with the sale, the Company sold $150.6 million in loans, $5.7 million in premises and
equipment and $134.3 million in deposits to First Community Bank. In connection with the sale, the
Company received a deposit premium of $3.8 million, removed $1.0 million of allowance for loan losses
associated with the sold loans, allocated and wrote-off $3.5 million of previously recorded goodwill, and
recorded a net gain of $1.5 million in this transaction.
In connection with the purchase transaction, the Company acquired assets with a fair value of $157.2
million, including $152.2 million in loans and $3.4 million in premises and equipment. Additionally, the
Company assumed $111.3 million in deposits and $0.2 million in other liabilities. In connection with the
purchase, the Company recorded: i) a discount on acquired loans of $1.5 million, ii) a premium on
deposits of $0.3 million, iii) a $1.2 million core deposit intangible, iv) and $5.4 million in goodwill.
The branch acquisition has been accounted for using the purchase method of accounting for business
combinations, and accordingly, the assets and liabilities of the acquired branches were recorded on the
Company’s balance sheet at their fair values as of July 15, 2016 and the related results of operations for
the acquired branches have been included in the Company’s consolidated statement of comprehensive
income since that date. The goodwill recorded in the branch exchange is deductible for tax purposes.
(4) On March 3, 2017, the Company completed its acquisition of Carolina Bank Holdings, Inc. (“Carolina
Bank”), headquartered in Greensboro, North Carolina, pursuant to an Agreement and Plan of Merger and
Reorganization dated June 21, 2016. The total merger consideration consisted of $25.3 million in cash
and 3.8 million shares of the Company’s common stock, with each share of Carolina Bank common stock
being exchanged for either $20.00 in cash or 1.002 shares of the Company’s stock, subject to the total
consideration being 75% stock / 25% cash. Carolina Bank operates eight branches located in Greensboro,
High Point, Burlington, Winston-Salem, and Asheboro, North Carolina and also operates three mortgage
offices in North Carolina. The acquisition is a natural extension of the Company’s recent expansion into
these high-growth areas. As of December 31, 2016, Carolina Bank had $705 million in total assets, $530
million in gross loans, and $598 million in total deposits. As of the filing of this annual report, the
Company has not completed the fair value measurements of Carolina Bank’s assets, liabilities and
identifiable intangible assets.
112
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2016 and 2015 are
summarized as follows:
($ 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
2016
2015
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
$ 17,497
151,001
33,833
83
$ 202,414
17,490
148,065
33,600
174
199,329
̶
155
91
96
342
(7)
(3,091)
(324)
(5)
(3,427)
19,000
122,474
25,216
88
166,778
18,972
121,553
24,946
143
165,614
$ 80,585
49,128
$ 129,713
79,283
50,912
130,195
̶
1,815
1,815
(1,302)
(31)
(1,333)
102,509
52,101
154,610
101,767
55,379
157,146
1
348
̶
64
413
̶
3,284
3,284
(29)
(1,269)
(270)
(9)
(1,577)
(742)
(6)
(748)
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, 2016:
($ 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
$ 7,990
196,999
27,027
−
801
$ 232,817
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
7
3,841
259
−
31
4,138
–
19,001
935
7
–
19,943
–
552
65
5
–
622
7,990
216,000
27,962
7
801
252,760
7
4,393
324
5
31
4,760
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
In the above tables, all of the non-equity securities that were in an unrealized loss position at December 31,
2016 and 2015 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
113
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,
2016 and 2015 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, 2016, by contractual
maturity, are summarized in the table below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Debt securities
Due within one year
Due after one year but within five years
Due after five years but within ten years
Due after ten years
Mortgage-backed securities
Total debt securities
Equity securities
Total securities
Securities Available for Sale
Amortized
Cost
Fair
Value
Securities Held to Maturity
Amortized
Cost
Fair
Value
$ −
17,497
28,833
5,000
151,001
202,331
83
$ 202,414
−
17,490
28,682
4,918
148,065
199,155
174
199,329
$ 2,016
16,256
29,690
1,166
80,585
129,713
̶
$ 129,713
2,028
16,767
30,981
1,136
79,283
130,195
̶
130,195
At December 31, 2016 and 2015, investment securities with carrying values of $147,009,000 and $141,379,000,
respectively, were pledged as collateral for public deposits.
In 2016, the Company received proceeds from sales of securities of $8,000 and recorded $3,000 in gains from
the sales. In 2015, the Company recorded $1,000 in securities losses associated with write-downs and did not
sell any securities. In 2014, the Company initiated security sales totaling $47,473,000, which resulted in net
gains of $786,000 in 2014.
Included in “other assets” in the Consolidated Balance Sheets are cost-method investments in Federal Home
Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”) stock totaling $19,826,000 and $15,893,000
at December 31, 2016 and 2015, respectively. The FHLB stock had a cost and fair value of $12,588,000 and
$8,846,000 at December 31, 2016 and 2015, 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 $7,238,000 and $7,047,000 at December 31, 2016 and 2015, respectively. 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.
114
Note 4. Loans and Asset Quality Information
Prior to September 22, 2016, the Company’s banking subsidiary, First Bank, had certain loans and foreclosed real
estate that were covered by loss share agreements between the FDIC and First Bank which afforded First Bank
significant loss protection - see Note 2 to the financial statements included in the Company’s 2011 Annual
Report on Form 10-K for detailed information regarding FDIC-assisted purchase transactions. On July 1, 2014,
the loss share provisions associated with non-single family assets related to the 2009 failed bank acquisition of
Cooperative Bank expired. On April 1, 2016, the loss share provisions associated with non-single family assets
related to the 2011 failed bank acquisition of The Bank of Asheville expired. On September 22, 2016, the
Company terminated all of the loss share agreements with the FDIC, such that all future losses and recoveries on
loans and foreclosed real estate associated with the failed banks acquired through FDIC-assisted transactions
will be borne solely by First Bank. As a result of the termination of the agreements, the Company recorded a
charge of $5.7 million, which primarily related to the write-off of the remaining indemnification asset associated
with the agreements, and is included in the indemnification asset expense amount of $10.3 million in the
Consolidated Statement of Income for the year ended December 31, 2016.
In the information presented below, the term “covered” is used to describe assets that were subject to FDIC loss
share agreements, while the term “non-covered” refers to the Company’s legacy assets, which were not
included in any type of loss share arrangement. As discussed previously, all loss share agreements were
terminated during 2016 and thus the entire loan portfolio is now classified as non-covered. Certain prior period
disclosures will continue to present the breakout of the loan portfolio between covered and non-covered.
As a result of the termination of all loss share agreements, the remaining balances associated with those loans
and foreclosed real estate were reclassified from the covered portfolio to the non-covered portfolio. Balances
related to the expired agreements and the termination of all remaining agreements as of the respective dates is
as follows:
Carrying value of total covered loans transferred to non-covered
Covered nonaccrual loans transferred to non-covered
Covered foreclosed real estate transferred to non-covered
Allowance for loan losses associated with covered loans transferred to
allowance for non-covered loans
Cooperative
Bank non-single
family
agreement
termination
July 1, 2014
$ 39,700
9,700
3,000
Bank of
Asheville non-
single family
agreement
termination
April 1, 2016
17,737
2,785
1,165
1,700
307
Remaining loss
share agreement
terminations
September 22,
2016
78,387
4,194
385
1,074
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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, 2016
December 31, 2015
Amount
Percentage
Amount
Percentage
$ 261,813
9%
$ 202,671
354,667
13%
308,969
family) first mortgages
750,679
28%
768,559
Real estate – mortgage – home equity loans
/ lines of credit
239,105
9%
232,601
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs (fees)
Total loans
1,049,460
55,037
2,710,761
(49)
$ 2,710,712
39%
2%
100%
957,587
47,666
2,518,053
873
$ 2,518,926
8%
12%
31%
9%
38%
2%
100%
Loans in the amount of $2.4 billion and $2.0 billion were pledged as collateral for certain borrowings as of
December 31, 2016 and December 31, 2015, respectively (see Note 10).
The loans above also include loans to executive officers and directors serving the Company at December 31,
2016 and to their associates, totaling approximately $2.6 million and $3.6 million at December 31, 2016 and
2015, respectively. During 2016 additions to such loans were approximately $0.3 million and repayments
totaled approximately $1.3 million. These loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with other non-related
borrowers. Management does not believe these loans involve more than the normal risk of collectability or
present other unfavorable features.
The following is a summary of the major categories of loans outstanding allocated to the non-covered and
covered loan portfolios for periods when the FDIC loss share agreements were in effect at December 31, 2015.
There were no covered loans at December 31, 2016.
($ in thousands)
December 31, 2015
Non-covered
Covered
Total
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
Subtotal
Unamortized net deferred loan costs
Total
$ 201,798
873
202,671
305,228
3,741
308,969
692,902
75,657
768,559
221,995
10,606
232,601
945,823
47,666
2,415,412
873
$ 2,416,285
11,764
–
102,641
–
102,641
957,587
47,666
2,518,053
873
2,518,926
116
As a result of the termination of the FDIC loss share agreements during the third quarter of 2016, there were no
covered loans at December 31, 2016. The follow presents the carrying amount of the covered loans at December
31, 2015 detailed by impaired and nonimpaired purchased loans (as determined on the date of the acquisition):
($ 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 following table presents information regarding covered purchased nonimpaired loans since December 31,
2014. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or
beyond. All balances of covered loans were transferred to non-covered as of the termination of the loss share
agreements.
($ in thousands)
Carrying amount of nonimpaired covered loans at December 31, 2014
Principal repayments
Transfers to foreclosed real estate
Net loan recoveries
Accretion of loan discount
Carrying amount of nonimpaired covered loans at December 31, 2015
Principal repayments
Transfers to foreclosed real estate
Net loan recoveries
Accretion of loan discount
Transfer to non-covered loans due to expiration of loss-share agreement, April 1, 2016
Transfer to non-covered loans due to termination of loss-share agreements, September 22, 2016
Carrying amount of nonimpaired covered loans at December 31, 2016
$ 125,644
(30,238)
(1,211)
2,306
4,751
101,252
(7,997)
(1,036)
1,784
1,908
(17,530)
(78,381)
$ –
As reflected in the table above, the Company accreted $1,908,000 of the loan discount on covered purchased
nonimpaired loans into interest income during 2016 prior to the termination of the loss share agreements. Total
loan discount accretion for all loans amounted to $4,451,000, $4,751,000 and $16,009,000 for the years ended
December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, there was a remaining loan discount of $11,258,000 related to purchased accruing
loans, which is expected to be accreted into interest income over the lives of the respective loans. At December
31, 2016, the Company also had $795,000 of loan discount related to purchased nonaccruing loans, which the
Company does not expect will be accreted into income.
117
The following table presents information regarding all purchased impaired loans since December 31, 2014. The
Company has applied the cost recovery method to all purchased impaired loans at their respective acquisition
dates due to the uncertainty as to the timing of expected cash flows, as reflected in the following table.
($ in thousands)
Purchased Impaired Loans
Balance at December 31, 2014
Change due to payments received
Transfer to foreclosed real estate
Other
Balance at December 31, 2015
Change due to payments received
Change due to loan charge-off
Balance at December 31, 2016
Fair Market
Value
Adjustment –
Write Down
(Nonaccretable
Difference)
3,262
(102)
(336)
(3)
2,821
(2,367)
(358)
96
Contractual
Principal
Receivable
$ 5,859
(634)
(431)
(3)
$ 4,791
(3,753)
(428)
$ 610
Carrying
Amount
2,597
(532)
(95)
−
1,970
(1,386)
(70)
514
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 2016, the Company received $1,160,000 in payments
that exceeded the carrying amount of the related purchased impaired loans, of which $786,000 was recognized
as discount accretion loan interest income and $374,000 was recorded as additional loan interest income.
During 2015, the Company received $332,000 in payments that exceeded the carrying amount of the related
purchased impaired loans, of which $275,000 was recognized as discount accretion loan interest income and
$57,000 was recorded as additional loan interest income.
Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and
still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are
summarized as follows:
ASSET QUALITY DATA ($ in thousands)
Nonperforming assets
Nonaccrual loans
Restructured loans - accruing
Accruing loans > 90 days past due
Total nonperforming loans
Foreclosed real estate
Total nonperforming assets
December 31,
2016
December 31,
2015
$ 27,468
22,138
−
49,606
9,532
$ 59,138
47,810
31,489
−
79,299
9,994
89,293
Total covered nonperforming assets included above (1)
$ –
12,100
_________________________________________________________________________________________________________
(1) All FDIC loss share agreements were terminated effective September 22, 2016 and, accordingly, assets previously covered under those agreements
became non-covered on that date.
At December 31, 2016 and 2015, the Company had $1.7 million and $2.5 million in residential mortgage loans in
process of foreclosure, respectively.
118
If the nonaccrual and restructured loans as of December 31, 2016, 2015 and 2014 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 $1,893,000, $3,213,000, and
$4,115,000 for nonaccrual loans and $1,417,000, $2,044,000, and $3,045,000, for restructured loans would have
been recorded for 2016, 2015, and 2014, respectively. Interest income on such loans that was actually collected
and included in net income in 2016, 2015 and 2014 amounted to approximately $266,000, $575,000, and
$1,176,000 for nonaccrual loans (prior to their being placed on nonaccrual status), and $423,000, $1,392,000,
and $2,003,000 for restructured loans, respectively. At December 31, 2016 and 2015, there were no
commitments to lend additional funds to debtors whose loans were nonperforming.
The following is a summary the Company’s nonaccrual loans by major categories.
($ 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
Total
Total covered nonaccrual loans included above
December 31,
2016
$ 1,842
2,945
16,017
2,355
4,208
101
$ 27,468
$ –
December 31,
2015
2,964
4,704
23,829
3,525
12,571
217
47,810
7,816
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2016.
($ 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
Total
Unamortized net deferred loan fees
Total loans
30-59
Days Past
Due
60-89 Days
Past Due
Nonaccrual
Loans
Current
Total Loans
Receivable
$ 92
–
1,842
259,879
261,813
473
4,487
1,751
1,482
186
$ 8,471
168
443
178
449
193
1,431
2,945
351,081
354,667
16,017
729,732
750,679
2,355
4,208
101
27,468
234,821
1,043,321
54,557
2,673,391
239,105
1,049,460
55,037
2,710,761
(49)
$ 2,710,712
The Company had no covered loans and no loans that were past due greater than 90 days and accruing interest
at December 31, 2016.
119
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2015.
($ 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
Total loans
Unamortized net deferred loan costs
Total loans
Covered loans included above
30-59
Days Past
Due
60-89 Days
Past Due
Nonaccrual
Loans
Current
Total Loans
Receivable
$ 999
127
2,964
198,581
202,671
1,512
15,443
1,276
5,591
278
$ 25,099
429
3,614
105
864
255
5,394
4,704
302,324
308,969
23,829
725,673
768,559
3,525
12,571
217
47,810
227,695
938,561
46,916
2,439,750
232,601
957,587
47,666
2,518,053
873
$ 2,518,926
$ 3,313
402
7,816
91,110
102,641
The Company had no non-covered or covered loans that were past due greater than 90 days and accruing
interest at December 31, 2015.
120
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2016.
There were no covered loans at December 31, 2016 and all reserves associated with previously covered loans
were transferred to the non-covered allowance.
($ in thousands)
Real Estate –
Construction,
Land
Development,
& Other Land
Loans
Real Estate
–
Residential
(1-4
Family)
First
Mortgages
Real Estate
– Mortgage
– Home
Equity
Lines of
Credit
Commercia
l, Financial,
and
Agricultural
Real Estate –
Mortgage –
Commercial
and Other
Installment
Loans to
Individuals
Unallo
-cated
Covered
Total
$ 4,742
(2,271)
805
As of and for the year ended December 31, 2016
Beginning
balance
Charge-offs
Recoveries
Transfer from
covered status
Removed due to
branch loan sale
Provisions
Ending balance
(263)
760
$ 3,829
(39)
(1,410)
2,691
3,754
(1,101)
1,422
65
56
7,832
(3,815)
1,060
839
(347)
2,135
7,704
2,893
(969)
250
293
(110)
63
2,420
5,816
(1,005)
836
127
(228)
(448)
5,098
1,051
(1,008)
354
696
(1)
−
1,799
(244)
1,958
28,583
(10,414)
6,685
−
1
(1,381)
−
(63)
811
1,145
−
198
894
−
(2,132)
−
(1,050)
(23)
23,781
$ 7
Ending balances as of December 31, 2016: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with
deteriorated
credit quality
$ −
$ 3,822
6,365
2,507
1,339
184
−
−
5
105
−
−
2,415
4,993
1,145
894
−
−
−
$ 261,813
Loans receivable as of December 31, 2016:
Ending balance
– total
Unamortized
net deferred
loan fees
Total loans
354,667
$ 644
Ending balances as of December 31, 2016: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with
deteriorated
credit quality
$ −
$ 261,169
350,666
4,001
−
750,679
239,105
1,049,460
55,037
20,807
280
6,494
−
729,872
238,825
1,042,452
55,037
−
−
514
−
121
–
–
–
−
1,640
22,141
−
2,710,761
(49)
$ 2,710,712
−
−
−
32,226
2,678,021
514
−
−
−
−
−
The following table presents the activity in the allowance for loan losses for non-covered and covered loans for
the year ended December 31, 2015.
($ in
thousands)
Real Estate –
Construction,
Land
Development,
& Other Land
Loans
Real Estate
– Residential
(1-4 Family)
First
Mortgages
Commercial
Financial,
and
Agricultural
Real
Estate–
Mortgage –
Home
Equity
Lines of
Credit
Real
Estate–
Mortgage–
Commercia
l and Other
Installment
Loans to
Individuals
Unallo-
cated
Total Non-
Covered
Total
Covered
As of and for the year ended December 31, 2015
Beginning
balance
Charge-offs
Recoveries
Provisions
Ending
balance
$ 6,769
(2,908)
831
50
8,158
(3,034)
998
(2,368)
$ 4,742
3,754
10,136
(4,904)
279
2,321
4,753
(1,054)
121
(927)
6,466
(2,804)
904
1,250
1,916
(2,411)
413
1,133
7,832
2,893
5,816
1,051
147
−
−
549
696
38,345
(17,115)
3,546
2,008
2,281
(1,316)
3,622
(2,788)
26,784
1,799
$ 304
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
$ 4,438
$ −
6,392
3,513
1,440
241
−
−
321
336
45
−
2,687
554
2,572
5,480
1,006
696
24,097
1,175
−
−
−
$ 201,798
Loans receivable as of December 31, 2015:
Ending
balance –
total
Unamortized
net deferred
loan costs
Total non-
covered loans
305,228
692,902
221,995
945,823
47,666
−
−
−
70
2,415,412
102,641
873
–
2,416,285
102,641
$ 992
Ending balances as of December 31, 2015: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans
acquired with
deteriorated
credit quality
$ −
$ 200,806
300,330
4,898
−
21,325
758
16,605
76
−
44,654
7,055
671,577
221,237
928,637
47,590
−
2,370,177
94,197
−
−
581
−
−
581
1,389
122
The following table presents loans individually evaluated for impairment as of December 31, 2016.
($ in thousands)
Impaired loans with no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial, financial, and agricultural
Real estate – mortgage – construction, land development
& other land loans
Real estate – mortgage – residential (1-4 family) first
mortgages
Real estate – mortgage –home equity loans / lines of
credit
Real estate – mortgage –commercial and other
Installment loans to individuals
Total impaired loans with no allowance
$ 593
706
3,221
4,558
10,035
12,220
114
5,112
−
$ 19,075
146
5,722
2
23,354
Impaired loans with an allowance recorded:
Commercial, financial, and agricultural
Real estate – mortgage – construction, land development
& other land loans
Real estate – mortgage – residential (1-4 family) first
mortgages
Real estate – mortgage –home equity loans / lines of
credit
Real estate – mortgage –commercial and other
Installment loans to individuals
Total impaired loans with allowance
$ 51
780
51
798
10,772
11,007
166
1,896
−
$ 13,665
166
1,929
−
13,951
−
−
−
−
−
−
−
7
184
1,339
5
105
−
1,640
816
3,641
11,008
139
8,713
1
24,318
202
844
13,314
324
4,912
49
19,645
Interest income recorded on impaired loans during the year ended December 31, 2016 was insignificant.
123
The following table presents loans individually evaluated for impairment as of December 31, 2015.
($ in thousands)
Impaired loans with no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial, financial, and agricultural
Real estate – mortgage – construction, land development
& other land loans
Real estate – mortgage – residential (1-4 family) first
mortgages
Real estate – mortgage –home equity loans / lines of
credit
Real estate – mortgage –commercial and other
Installment loans to individuals
Total impaired loans with no allowance
$ 360
422
3,944
7,421
12,346
14,644
121
13,156
3
$ 29,930
175
16,818
4
39,484
Total covered impaired loans with no allowance included
above
$ 5,231
8,529
Impaired loans with an allowance recorded:
Commercial, financial, and agricultural
Real estate – mortgage – construction, land development
& other land loans
Real estate – mortgage – residential (1-4 family) first
mortgages
Real estate – mortgage –home equity loans / lines of
credit
Real estate – mortgage –commercial and other
Installment loans to individuals
Total impaired loans with allowance
$ 676
954
709
976
15,285
15,691
667
6,094
73
$ 23,749
678
6,279
80
24,413
−
−
−
−
−
−
−
−
348
241
1,912
344
421
45
3,311
235
4,651
11,258
505
18,112
5
34,766
5,607
616
1,980
15,636
430
4,950
111
23,723
Total covered impaired loans with allowance included
above
$ 3,213
3,476
624
3,742
Interest income recorded on impaired loans during the year ended December 31, 2015 was insignificant.
124
The Company tracks credit quality based on its internal risk ratings. Upon origination a loan is assigned an initial
risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value
ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process
are declined. After loans are initially graded, they are monitored regularly for credit quality based on many
factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be
downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies
are consistent throughout each loan type.
The following describes the Company’s internal risk grades in ascending order of likelihood of loss:
Pass:
Risk Grade
Description
1
2
3
4
5
P
(Pass)
6
7
8
9
F
(Fail)
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.
Loans that represent above average risk due to minor weaknesses and warrant closer
scrutiny by management. Collateral is generally available and felt to provide reasonable
coverage with realizable liquidation values in normal circumstances. Repayment
performance is satisfactory.
Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who
exhibit good personal credit history, average personal financial strength and moderate
debt levels. These loans generally conform to Bank policy, but may include approved
mitigated exceptions to the guidelines.
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.
Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind
with no mitigating factors, history of paying outside the terms of the note, insufficient
income to support the current level of debt, etc.
Special Mention:
Classified:
In the second quarter of 2016, the Company made nonsubstantive changes to the numerical scale of risk grades.
Previously, the description for grade 5 noted above was assigned a grade of 9. As a result of the change, most
grade 9 loans were assigned a grade of 5 and the numerical grade assignments for the previous grades of 5 and
below were moved one row lower in the descriptions. In the tables below, prior periods have been adjusted to
be consistent with the presentation for December 31, 2016.
Also during the second quarter of 2016, the Company introduced a pass/fail grade system for smaller balance
consumer loans (balances less than $500,000), primarily residential home loans and installment consumer loans.
Accordingly, all such consumer loans are no longer graded on a scale of 1-9, but instead are assigned a rating of
“pass” or “fail”, with “fail” loans being considered as classified loans. As of the implementation of the revised
grade definitions, there were approximately $29.7 million of consumer loans that had previously been assigned
grade of “special mention” and were assigned a rating of “pass”, which impacts the comparability of the
December 31, 2016 table below to prior periods.
125
The changes noted above had no significant impact on the Company’s allowance for loan loss calculation.
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2016.
($ 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
Total
Unamortized net deferred loan fees
Total loans
Pass
Special
Mention Loans
Classified
Accruing Loans
Classified
Nonaccrual
Loans
Total
$ 247,451
335,068
678,878
226,159
1,005,687
54,421
$ 2,547,664
10,560
8,762
16,998
1,436
26,546
256
64,558
1,960
7,892
38,786
9,155
13,019
259
71,071
1,842
2,945
261,813
354,667
16,017
750,679
2,355
239,105
4,208
101
27,468
1,049,460
55,037
2,710,761
(49)
2,710,712
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2015.
($ 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
Total
Unamortized net deferred loan costs
Total loans
Pass
Special
Mention Loans
Classified
Accruing Loans
Classified
Nonaccrual
Loans
Total
$ 192,454
280,647
664,618
212,391
897,579
46,209
$ 2,293,898
3,733
13,489
39,895
7,374
33,155
776
98,422
3,520
10,129
40,217
9,311
14,282
464
77,923
2,964
4,704
202,671
308,969
23,829
768,559
3,525
232,601
12,571
217
47,810
957,587
47,666
2,518,053
873
2,518,926
Total covered loans included above
$ 71,398
7,423
16,004
7,816
102,641
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.
126
The vast majority of the Company’s troubled debt restructurings modified during the year ended December 31,
2016 and 2015 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.
The following table presents information related to loans modified in a troubled debt restructuring during the
years ended December 31, 2016 and 2015.
($ in thousands)
TDRs – Accruing
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
TDRs – Nonaccrual
Commercial, financial, and agricultural
Real estate – construction, land development &
other land loans
Real estate – mortgage – residential (1-4 family)
first mortgages
Real estate – mortgage – home equity loans / lines
of credit
Real estate – mortgage – commercial and other
Installment loans to individuals
Total TDRs arising during period
Total covered TDRs arising during period included
above
For the year ended
December 31, 2016
For the year ended
December 31, 2015
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
1
−
1
−
−
−
−
−
1
−
−
−
3
–
$ 1,071
$ 1,071
−
598
−
−
−
−
−
−
626
−
−
−
−
−
155
184
−
−
−
−
−
−
2
1
2
−
4
−
1
3
4
−
−
−
$ 52
$ 52
235
265
−
557
−
5
496
399
−
−
−
235
265
−
557
−
5
496
399
−
−
−
$ 1,824
$ 1,881
17
$ 2,009
$ 2,009
–
–
2
$ 139
$ 139
127
Accruing restructured loans that were modified in the previous 12 months and that defaulted during the years
ended December 31, 2016 and 2015 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)
Accruing TDRs that subsequently defaulted
Commercial, financial, and agricultural
Real estate – mortgage – residential (1-4 family first
mortgages)
Real estate – mortgage – commercial and other
Total accruing TDRs that subsequently defaulted
Total covered accruing TDRs that subsequently defaulted
included above
Note 5. Premises and Equipment
For the year ended
December 31, 2016
For the year ended
December 31, 2015
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
2
−
1
3
1
$ 744
−
21
$ 765
$ 44
1
4
−
5
–
$ 7
352
−
$ 359
$ –
Premises and equipment at December 31, 2016 and 2015 consisted of the following:
($ in thousands)
2016
2015
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
$ 23,404
67,032
37,780
2,192
130,408
(55,057)
$ 75,351
23,750
66,527
36,246
1,704
128,227
(53,668)
74,559
As discussed previously in Note 4 – Loans and Asset Quality Information, the Company terminated all loss share
agreements with the FDIC during 2016. As a result, the remaining balance in the FDIC Indemnification Asset,
which represented the estimated amount to be received from the FDIC under the loss share agreements, was
written off as indemnification asset expense as of the termination date.
At December 31, 2016 and 2015, 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
2016
$ −
−
−
$ −
2015
(633)
8,675
397
8,439
128
The following presents a rollforward of the FDIC indemnification asset since January 1, 2014.
($ in thousands)
Balance at January 1, 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
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
Increase (decrease) related to unfavorable (favorable) changes in loss estimates
Increase related to reimbursable expenses
Cash paid
Decrease related to accretion of loan discount
Other
Write off of asset balance upon termination of FDIC loss share agreements effective September 22, 2016
Balance at December 31, 2016
Note 7. Goodwill and Other Intangible Assets
$ 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
(2,246)
205
1,554
(2,005)
(236)
(5,711)
$ ―
The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible
assets as of December 31, 2016 and December 31, 2015 and the carrying amount of unamortized intangible
assets as of those same dates.
December 31, 2016
December 31, 2015
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
($ in thousands)
Amortized intangible assets:
Customer lists
Core deposit premiums
Other
Total
$ 2,369
9,730
1,032
$ 13,131
SBA servicing asset
$ 415
746
8,143
224
9,113
678
8,560
̶
9,238
−
550
7,352
̶
7,902
Unamortized intangible assets:
Goodwill
$ 75,042
65,835
Activity related to transactions during the year includes the following:
(1) In connection with the January 1, 2016 acquisition of Bankingport, Inc., an insurance agency located in
Sanford, North Carolina, the Company recorded $1,693,000 in goodwill, $591,000 in a customer list
intangible, and $92,000 in other amortizable intangible assets.
(2) In connection with the May 5, 2016 acquisition of SBA Complete, Inc., an SBA loan consulting firm, the
Company recorded $5,553,000 in goodwill, $1,100,000 in a customer list intangible, and $940,000 in
other amortizable intangible assets.
(3) In connection with the branch exchange transaction with First Community Bank in Bluefield, Virginia, the
Company recorded a net increase of $1,961,000 in goodwill and $1,170,000 in core deposit premiums.
In addition to the above acquisition related activity, the Company recorded $415,000 in servicing assets
associated with the guaranteed portion of SBA loans originated and sold during 2016. Servicing assets are
129
recorded at fair value and amortized as a reduction of service fee income over the expected life of the related
loans.
Amortization expense totaled $1,211,000, $722,000 and $777,000 for the years ended December 31, 2016, 2015
and 2014, respectively.
Goodwill is evaluated for impairment on at least an annual basis – see Note 1(r). For each of the years
presented, the Company’s evaluation indicated that there was no goodwill impairment.
The following table presents the estimated amortization expense for intangible assets for each of the five
calendar years ending December 31, 2021 and the estimated amount amortizable thereafter. These estimates
are subject to change in future periods to the extent management determines it is necessary to make
adjustments to the carrying value or estimated useful lives of amortized intangible assets.
($ in thousands)
Estimated
Amortization Expense
2017
2018
2019
2020
2021
Thereafter
Total
$ 1,240
874
665
439
315
485
$ 4,018
Note 8. Income Taxes
Total income taxes for the years ended December 31, 2016, 2015, and 2014 were allocated as follows:
($ In thousands)
2016
2015
2014
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
$ 14,624
14,126
13,535
(685)
(36)
$ 13,903
(184)
(1,716)
12,226
518
(2,103)
11,950
The components of income tax expense (benefit) for the years ended December 31, 2016, 2015, and 2014 are as
follows:
($ in thousands)
Current - Federal
- State
Deferred - Federal
- State
Total
2016
$ 12,827
1,679
16
102
$ 14,624
2015
9,149
1,436
3,205
336
14,126
2014
1,316
903
10,104
1,212
13,535
130
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax
assets (liabilities) at December 31, 2016 and 2015 are presented below:
($ in thousands)
2016
2015
Deferred tax assets:
Allowance for loan losses
Excess book over tax pension & 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
All other
Gross deferred tax liabilities
Net deferred tax asset (liability) - included in other assets
$ 8,758
290
36
868
2,287
1,852
610
2,539
545
160
1,138
191
19,274
(43)
19,231
(1,548)
---
(954)
(12,156)
(409)
(12)
(15,079)
$ 4,152
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
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 2016 and 2015 deferred tax expense (benefit) of approximately ($685,000) and
($184,000) 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 2016 and 2015
deferred tax expense (benefit) of ($36,000) and ($1,716,000) respectively, has been recorded directly to
shareholders’ equity. The balance of the 2016 decrease in the net deferred tax asset of $118,000 is reflected as
a deferred income tax expense, and the balance of the 2015 decrease in the net deferred tax asset of
$3,541,000 is reflected as a deferred income tax expense in the consolidated statement of income.
The valuation allowances for 2016 and 2015 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 state income
tax rate, which reduced the state income tax rate to 5% in 2015 and 4% in 2016. The North Carolina state
income tax rate further declines to 3% effective January 1, 2017.
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 are subject to income tax audit by state agencies
beginning with the year 2014. The Company’s state tax returns are subject to income tax audit by state agencies
beginning with the year 2013. There are no indications of any material adjustments relating to any examination
currently being conducted by any taxing authority.
131
Retained earnings at December 31, 2016 and 2015 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)
2016
2015
2014
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
$ 14,746
(1,202)
(192)
16
1,158
(24)
122
$ 14,624
14,405
(930)
(191)
11
1,152
(58)
(263)
14,126
13,486
(832)
(179)
11
1,375
16
(342)
13,535
Note 9. Time Deposits and Related Party Deposits
At December 31, 2016, the scheduled maturities of time deposits were as follows:
($ in thousands)
2017
2018
2019
2020
2021
Thereafter
$ 507,965
83,954
19,998
25,442
22,418
1,737
$ 661,514
Deposits received from executive officers and directors and their associates totaled approximately $3,030,000
and $1,982,000 at December 31, 2016 and 2015, 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, 2016 and 2015, the Company held $276.4 million and $226.0 million, respectively, in time
deposits of $250,000 or more (which is the current FDIC insurance limit for insured deposits as of December 31,
2016). Included in these deposits were brokered deposits of $133.4 million and $71.8 million at December 31,
2016 and 2015, respectively.
132
Note 10. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31,
2016 and 2015:
Description - 2016
Due date
Call Feature
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
Trust Preferred Securities
1/27/17
1/30/17
4/18/17
12/26/17
12/29/17
12/24/18
1/23/34
None
None
None
None
None
None
Quarterly by Company
beginning 1/23/09
2016
Amount
$ 20,000,000
80,000,000
50,000,000
20,000,000
35,000,000
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, 2016
$ 271,394,000
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
Interest Rate
0.61% fixed
0.63% fixed
0.70% fixed
1.19% fixed
0.80% fixed
1.57% fixed
3.59% at 12/31/16
adjustable rate
3 month LIBOR + 2.70%
2.35% at 12/31/16
adjustable rate
3 month LIBOR + 1.39%
1.16%
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%
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%.
133
At December 31, 2016, the Company had three sources of readily available borrowing capacity – 1) an
approximately $707 million line of credit with the FHLB, of which $225 million was outstanding at December 31,
2016 and $140 million was outstanding at December 31, 2015, 2) a $35 million federal funds line of credit with a
correspondent bank, of which none was outstanding at December 31, 2016 or 2015, and 3) an approximately
$101 million line of credit through the Federal Reserve Bank of Richmond’s (FRB) discount window, of which
none was outstanding at December 31, 2016 or 2015.
The Company’s line of credit with the FHLB totaling approximately $707 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, 2016 and 2015, 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
$289 million at December 31, 2016.
The Company’s correspondent bank relationship allows the Company to purchase up to $35 million in federal
funds on an overnight, unsecured basis (federal funds purchased). The Company had no borrowings
outstanding under this line at December 31, 2016 or 2015.
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, 2016, the available line of credit was approximately $101
million. The Company had no borrowings outstanding under this line of credit at December 31, 2016 or 2015.
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 $1.5 million in 2016, $1.2 million in 2015, and $1.2 million in 2014.
Future obligations for minimum rentals under noncancelable operating leases at December 31, 2016 are as
follows:
($ in thousands)
Year ending December 31:
2017
2018
2019
2020
2021
Thereafter
Total
$ 1,404
1,120
1,001
759
541
2,674
$ 7,499
134
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 $1.6 million for the year ended December 31, 2016 and $1.4
million for each of the years ended December 31, 2015 and 2014. Although discretionary contributions by the
Company are permitted by the plan, the Company did not make any such contributions in 2016, 2015 or 2014.
The Company’s matching and discretionary contributions are made according to the same investment elections
each participant has established for their deferral contributions.
Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the
“Pension Plan”) that qualified under Section 401(a) of the Internal Revenue Code. The Pension Plan provided for
a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final
Average Annual Compensation (5 highest consecutive calendar years’ earnings out of the last 10 years of
employment) multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65% of Final
Average Annual Compensation in excess of the average social security wage base multiplied by years of service
not in excess of 35 years. Benefits were fully vested after five years of service. Effective December 31, 2012, the
Company froze the Pension Plan for all participants.
The Company’s contributions to the Pension Plan are based on computations by independent actuarial
consultants and are intended to be deductible for income tax purposes. As discussed below, the contributions
are invested to provide for benefits under the Pension Plan. The Company did not make any contributions to
the Pension Plan in 2016, 2015 or 2014. The Company does not expect to contribute to the Pension Plan in
2017.
135
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between
the two amounts representing the funded status of the Pension Plan as of the end of the respective year.
($ 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
2016
2015
2014
$ 36,164
−
1,502
1,288
(2,114)
−
36,840
35,489
3,575
−
(2,114)
36,950
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
Funded status at end of year
$ 110
(675)
1,667
The accumulated benefit obligation related to the Pension Plan was $36,840,000, $36,164,000, and $35,615,000
at December 31, 2016, 2015, and 2014, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2016 and 2015 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands)
Other assets
Other liabilities
2016
2015
$ 110
−
$ 110
−
(675)
(675)
The following table presents information regarding the amounts recognized in accumulated other
comprehensive income (“AOCI”) at December 31, 2016 and 2015, as it relates to the Pension Plan.
($ in thousands)
2016
2015
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
Net amount recognized as increase (decrease) to AOCI
$ (5,856)
−
(5,856)
2,164
$ (3,692)
(5,682)
−
(5,682)
2,216
(3,466)
136
The following table reconciles the beginning and ending balances of AOCI at December 31, 2016 and 2015, as it
relates to the Pension Plan:
($ in thousands)
2016
2015
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
$ (3,466)
(412)
̶
̶
238
̶
(52)
$ (3,692)
(1,133)
(3,825)
̶
̶
̶
̶
1,492
(3,466)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the
Pension Plan:
($ in thousands)
2016
2015
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
$ 5,007
958
̶
$ 5,965
3,524
1,483
̶
5,007
Net pension (income) cost for the Pension Plan included the following components for the years ended
December 31, 2016, 2015, and 2014:
($ in thousands)
2016
2015
2014
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
$ ̶
1,502
(2,698)
238
$ (958)
̶
1,364
(2,847)
̶
(1,483)
̶
1,461
(2,779)
̶
(1,318)
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, 2017
Year ending December 31, 2018
Year ending December 31, 2019
Year ending December 31, 2020
Year ending December 31, 2021
Years ending December 31, 2022-2026
Estimated
benefit
payments
$ 1,443
1,554
1,705
1,769
1,858
9,920
For each of the years ended December 31, 2016, 2015, and 2014, 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
137
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, 2016, 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, 2016 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 fund
Mid cap fund
Small cap fund
Foreign equity fund
Company stock
BofAML USD LIBOR 3 Month Index
Barclays Intermediate Government Bond Index
Barclays Aggregate Index
Barclays High Yield Index
S&P 500 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, 2016.
138
The fair values of the Company’s pension plan assets at December 31, 2016, by asset category, are as follows:
($ in thousands)
Fixed income investments
Money market funds
Equity investments
Large cap value fund
Small cap growth fund
Mid cap equity fund
Foreign equity fund
Company stock
Total
Total Fair Value
at December 31,
2016
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 9,590
−
9,590
−
15,595
2,624
3,220
2,669
3,252
$ 36,950
15,595
2,624
3,220
2,669
3,252
27,360
−
−
−
−
−
9,590
−
−
−
−
−
−
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 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, 2016 and 2015.
- 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
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
139
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
2016
2015
2014
$ 5,778
106
238
145
(357)
̶
5,910
─
$ (5,910)
5,216
201
206
497
(342)
̶
5,778
─
(5,778)
5,292
272
212
(265)
(295)
̶
5,216
─
(5,216)
The accumulated benefit obligation related to the SERP was $5,910,000, $5,778,000, and $5,216,000 at
December 31, 2016, 2015, and 2014, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets
at December 31, 2016 and 2015 as it relates to the SERP, excluding the related deferred tax assets.
($ in thousands)
Other assets – prepaid pension asset (liability)
Other assets (liabilities)
2016
2015
$ (6,754)
844
$ (5,910)
(6,802)
1,024
(5,778)
140
The following table presents information regarding the amounts recognized in AOCI at December 31, 2016 and
2015, as it relates to the SERP:
($ 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
2016
2015
$ 844
−
844
(311)
$ 533
1,024
−
1,024
(399)
625
The following table reconciles the beginning and ending balances of AOCI at December 31, 2016 and 2015, as it
relates to the SERP:
($ in thousands)
2016
2015
Accumulated other comprehensive income 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
$ 625
(145)
−
(35)
−
88
$ 533
976
(497)
−
(79)
−
225
625
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
2016
2015
$ (6,802)
(309)
357
$ (6,754)
(6,816)
(328)
342
(6,802)
Net pension cost for the SERP included the following components for the years ended December 31, 2016, 2015,
and 2014:
($ in thousands)
2016
2015
2014
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
$ 106
238
(35)
$ 309
201
206
(79)
328
272
212
(221)
263
141
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, 2017
Year ending December 31, 2018
Year ending December 31, 2019
Year ending December 31, 2020
Year ending December 31, 2021
Years ending December 31, 2022-2026
Estimated
benefit
payments
$ 368
421
417
415
418
2,052
The following assumptions were used in determining the actuarial information for the Pension Plan and the
SERP for the years ended December 31, 2016, 2015, and 2014:
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
2016
2015
2014
Pension
Plan
4.17%
3.97%
7.75%
n/a
SERP
4.17%
3.97%
n/a
n/a
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
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, 2016.
($ 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
$ 139
116
$ 255
Variable Rate
237
256
493
Total
376
372
748
At December 31, 2016 and 2015, the Company had $12.7 million and $13.1 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
142
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, and Chesterfield, Dillon, and Florence Counties in South Carolina. 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.
143
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, 2016 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
Fannie Mae – mortgage-backed securities
Freddie Mac – mortgage-backed securities
Small Business Administration
Ginnie Mae - mortgage-backed securities
Federal Home Loan Bank of Atlanta - common stock
Federal Home Loan Bank System - bonds
Federal Reserve Bank - common stock
Bank of America corporate bond
Citigroup, Inc. corporate bond
Goldman Sachs Group Inc. corporate bond
JP Morgan Chase corporate bond
Financial Institutions, Inc. corporate bond
Craven County, North Carolina municipal bond
Spartanburg, South Carolina Sanitary Sewer District municipal bond
Wells Fargo & Company corporate bond
Freddie Mac – bonds
Federal Farm Credit bonds
Eagle Bancorp corporate bond
South Carolina State municipal bond
Virginia State Housing Authority municipal bond
Amortized Cost
$ 79,105
76,161
40,315
36,006
12,588
11,498
7,238
7,000
6,041
5,108
5,027
4,000
3,554
3,264
3,100
3,000
3,000
2,556
2,170
2,034
Fair Value
77,446
74,789
39,576
35,538
12,588
11,498
7,238
6,955
6,000
5,054
4,995
3,983
3,686
3,423
3,053
3,000
2,993
2,625
2,320
2,113
The Company places its deposits and correspondent accounts with the Federal Home Loan Bank of Atlanta, the
Federal Reserve Bank, Pacific Coast Bankers Bank (“PCBB”), and Bank of America. At December 31, 2016, the
Company had deposits in the Federal Home Loan Bank of Atlanta totaling $4.1 million, deposits of $230.1 million
in the Federal Reserve Bank, deposits of $40.9 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 $250,000.
Note 14. Fair Value of Financial Instruments
Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance
describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
144
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2016.
($ 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
Foreclosed real estate
Fair Value at
December 31,
2016
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 17,490
148,065
33,600
174
$ 199,329
$ 12,284
9,532
—
—
—
—
—
—
—
17,490
148,065
33,600
174
199,329
—
—
—
—
—
—
—
12,284
9,532
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
Foreclosed real estate
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
$ 20,645
9,994
—
—
—
—
—
—
—
18,972
121,553
24,946
143
165,614
—
—
—
—
—
—
—
20,645
9,994
The following is a description of the valuation methodologies used for instruments measured at fair value.
Securities Available for Sale — When quoted market prices are available in an active market, the
securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available,
but fair values can be estimated by observing quoted prices of securities with similar characteristics, the
securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s
Level 2 securities are determined by our third-party bond accounting provider using matrix pricing.
Matrix pricing is a mathematical technique widely used in the industry to value debt securities without
relying exclusively on quoted prices for the specific securities but rather by relying on the securities’
relationship to other benchmark quoted securities. For the Company, Level 2 securities include
mortgage-backed securities, collateralized mortgage obligations, government-sponsored enterprise
securities, and corporate bonds. In cases where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy.
The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the
fair value determination is consistent with the applicable accounting guidance and that the investments
145
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,
2016, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description
Impaired loans
Foreclosed real estate
Fair Value at
December 31,
2016
Valuation
Technique
$ 12,284 Appraised value;
PV of expected
cash flows
9,532 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 and
estimated costs to sell
General Range
of Significant
Unobservable
Input Values
0-10%
0-10%
146
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
Foreclosed real estate
Fair Value at
December 31,
2015
Valuation
Technique
$ 20,645 Appraised value;
PV of expected
cash flows
9,994 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 and
estimated costs to sell
General Range
of Significant
Unobservable
Input Values
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, 2016 or 2015.
For the years ended December 31, 2016 and 2015, the decrease in the fair value of securities available for sale
was $1,919,000 and $473,000, respectively, which is included in other comprehensive income (net of tax benefit
of $683,000 and $184,000, respectively). Fair value measurement methods at December 31, 2016 and 2015 are
consistent with those used in prior reporting periods.
As discussed in Note 1(q), the Company is required to disclose estimated fair values for its financial instruments.
Fair value estimates as of December 31, 2016 and 2015 and limitations thereon are set forth below for the
Company’s financial instruments. See Note 1(q) for a discussion of fair value methods and assumptions, as well
as fair value information for off-balance sheet financial instruments.
($ 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, 2016
December 31, 2015
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
$ 71,645
$ 71,645
53,285
53,285
Level 1
Level 1
Level 2
Level 2
Level 1
Level 3
Level 1
Level 3
Level 1
Level 2
Level 2
Level 2
234,348
−
199,329
129,713
2,116
2,686,931
9,286
−
74,138
2,947,353
271,394
539
234,348
−
199,329
130,195
2,116
2,650,820
9,286
−
74,138
2,944,968
263,255
539
213,426
557
165,614
154,610
4,323
2,490,343
9,166
8,439
72,086
2,811,285
186,394
585
213,426
557
165,614
157,146
4,323
2,484,059
9,166
8,256
72,086
2,809,828
178,468
585
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
147
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 $714,000, $710,000 and $270,000 for the
years ended December 31, 2016, 2015, and 2014, 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 $264,000, $277,000, and $105,000 of income tax benefits related to stock based
compensation expense in the income statement for the years ended December 31, 2016, 2015, and 2014,
respectively.
At December 31, 2016, the Company had the following equity-based compensation plans: the First Bancorp 2014
Equity Plan and the First Bancorp 2007 Equity 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, 2016, the First Bancorp 2014 Equity Plan was the only plan that had shares
available for future grants, and there were 853,920 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
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, $129,000, and $177,000 for each the three
148
years ended December 31, 2016, 2015 and 2014, respectively, and is classified as “other operating expense” in
the Consolidated Statements of Income.
In 2014, the Company’s Compensation Committee determined that a group 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. Accordingly, in February 2015 and February 2016, a total of 40,914 shares of restricted stock
were granted related to performance in the preceding fiscal year. Total compensation expense associated with
those grants was $556,000 and is being recognized over the vesting period. For 2016 and 2015, total
compensation expense related to these grants was $220,000 and $93,000, respectively.
In 2014, 2015 and 2016, the Compensation Committee also granted 105,616 shares of stock to various
employees of the Company to promote retention. The total value associated with these grants amounted to
$1.9 million, which is being recorded as expense over their three year vesting periods. For 2016, 2015, and
2014, total compensation expense related to these grants was $366,000, $488,092, and $93,000, respectively.
All grants were issued based on the closing price of the Company’s common stock on the date of the grant.
Based on the vesting schedules of the shares of restricted stock currently outstanding, the Company expects to
record $546,000 in stock-based compensation expense in 2017.
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.
At December 31, 2016, there were 59,948 stock options outstanding related to the two First Bancorp plans, with
exercise prices ranging from $14.35 to $20.80.
149
The following table presents information regarding the activity since January 1, 2014 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, 2014
392,658
$ 17.71
Granted
Exercised
Forfeited
Expired
−
(4,500)
(75,000)
(134,056)
−
15.58
9.76
21.10
$ 6,525
Balance at December 31, 2014
179,102
$ 18.55
Granted
Exercised
Forfeited
Expired
−
(7,353)
−
(54,341)
−
15.20
−
19.93
Balance at December 31, 2015
117,408
$ 18.12
Granted
Exercised
Forfeited
Expired
−
(23,710)
−
(33,750)
−
15.84
−
21.39
$ 19,843
$ 81,894
Outstanding at December 31, 2016
59,948
$ 17.18
1.39
$ 597,148
Exercisable at December 31, 2016
59,948
$ 17.18
1.39
$ 597,148
In 2016, 2015 and 2014, the Company received $375,000, $112,000 and $70,000, respectively, as a result of
stock option exercises. The Company recorded insignificant tax benefits from the exercise of nonqualified stock
options during the years ended December 31, 2016, 2015, and 2014.
The following table summarizes information about the stock options outstanding at December 31, 2016:
Range of
Exercise Prices
$13.27 to $15.48
$15.48 to $17.70
$17.70 to $19.91
$19.91 to $22.12
Options Outstanding
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
Number
Outstanding
at 12/31/16
Options Exercisable
Number
Exercisable
at 12/31/16
Weighted-
Average
Exercise
Price
9,000
34,698
11,250
5,000
59,948
2.4
1.5
0.4
1.3
1.4
$ 14.35
16.60
19.61
20.80
$ 17.18
9,000
34,698
11,250
5,000
59,948
$ 14.35
16.60
19.61
20.80
$ 17.18
150
The following table presents information regarding the activity during 2014, 2015, and 2016 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, 2014
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
Granted during the period
Vested during the period
Forfeited or expired during the period
65,255
(28,794)
̶
19.40
17.79
̶
Nonvested at December 31, 2016
91,790
$ 18.65
Note 16. Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve System (“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.
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,
2016, the Bank had undivided profits of approximately $173,823,000 which were available for the payment of
dividends (subject to remaining in compliance with regulatory capital requirements). As of December 31, 2016,
approximately $241,600,000 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 FED was approximately
$1,746,000 for the year ended December 31, 2016.
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
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.
151
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 were phased in beginning January 1, 2016, at 0.625% of risk weighted assets,
and will increase each year until fully implemented at 2.5% in January 1, 2019.
As of December 31, 2016, 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, 2016 and 2015 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.
152
Also see Note 19 for discussion of preferred stock transactions that have affected the Company’s capital ratios.
($ in thousands)
As of December 31, 2016
Common Equity Tier I Capital Ratio
Company
Bank
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
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
Amount
Ratio
(must equal or exceed)
To Be Well Capitalized
Under Current Prompt
Corrective Action Provisions
Amount
Ratio
(must equal or exceed)
$ 308,712
350,578
10.92%
12.40%
$ 197,968
197,858
7.00%
7.00%
$ N/A
183,725
377,847
375,062
353,363
350,578
353,363
350,578
13.36%
13.27%
296,952
296,787
10.50%
10.50%
N/A
282,654
12.49%
12.40%
10.17%
10.10%
240,390
240,256
138,981
138,908
8.50%
8.50%
4.00%
4.00%
N/A
226,124
N/A
173,634
$ 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%
N/A
6.50%
N/A
10.00%
N/A
8.00%
N/A
5.00%
153
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, 2016, 2015, and 2014 are as follows:
($ in thousands)
2016
2015
2014
Other service charges, commissions, and fees – debit card interchange income
Other service charges, commissions, and fees – other interchange income
Other operating expenses – credit/debit card processing 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
Other operating expenses – outside consultants
Other operating expenses – legal and audit
Other operating expenses – marketing
Note 18. Condensed Parent Company Information
$ 6,564
3,018
2,296
2,066
2,311
2,009
2,010
1,604
1,842
1,700
1,408
1,999
6,433
2,288
6,137
1,786
2,181
2,039
2,133
2,394
1,935
1,710
2,167
1,677
1,689
1,674
1,728
1,710
1,990
3,988
1,654
1,716
2,092
1,663
1,955
1,487
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,
2016
2015
$ 4,530
410,261
7
1,659
$ 416,457
$ 46,394
1,962
48,356
368,101
$ 416,457
3,816
384,926
7
1,652
390,401
46,394
1,817
48,211
342,190
390,401
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31,
2016
2015
2014
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
$ 9,000
20,517
(1,216)
(792)
27,509
(175)
72,500
(43,328)
(1,032)
(1,106)
27,034
(603)
9,000
18,343
(1,007)
(1,340)
24,996
(868)
Net income available to common shareholders
$ 27,334
26,431
24,128
154
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
2016
Year Ended December 31,
2015
2014
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
$ 27,509
27,034
24,996
(20,517)
15
130
7,137
(6,632)
−
375
(166)
(6,423)
714
3,816
$ 4,530
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
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.
For the twelve months ended December 31, 2015 and 2014, the Company accrued approximately $370,000 and
$635,000, respectively, in preferred dividend payments for the Series B Preferred Stock. This amount is
deducted from net income in computing “Net income available to common shareholders.”
Stock Issuance
On December 21, 2012, the Company issued 2,656,294 shares of its common stock and 728,706 shares of the
Company’s Series C Preferred Stock to certain accredited investors, each at the price of $10.00 per share,
pursuant to a private placement transaction. Net proceeds from this sale of common and preferred stock were
$33.8 million and were used to strengthen and remove risk from the Company’s balance sheet in anticipation of
a planned disposition of certain classified loans and write-down of foreclosed real estate.
On December 22, 2016, the Company and the holder of the Series C Preferred Stock entered into an agreement
to convert the preferred stock into common stock. The Company exchanged 728,706 shares of preferred stock
for the same number of shares of the Company’s common stock. As a result of the exchange, the Company has
no shares of preferred stock currently outstanding.
155
The Series C Preferred Stock qualified as Tier 1 capital and was Convertible Perpetual Preferred Stock, with
dividend rights equal to the Company’s common stock. The Series C Preferred Stock was non-voting, except in
limited circumstances.
The Series C Preferred Stock paid a dividend per share equal to that of the Company’s common stock. The
Company accrued approximately $175,000, $233,000, and $233,000 in preferred dividend payments for the
Series C Preferred Stock during 2016, 2015, and 2014, respectively.
Note 20. Subsequent Events
As discussed in more detail in Note 2, on March 3, 2017, the Company completed its acquisition of Carolina Bank
Holdings, Inc., headquartered in Greensboro, North Carolina, with approximately $705 million in total assets.
The total merger consideration consisted of $25.3 million in cash and 3.8 million shares of the Company’s
common stock.
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 accompanying consolidated balance sheets of First Bancorp and subsidiaries (the
“Company”) as of December 31, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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, 2017 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, 2017
157
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, 2016, 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, 2016, 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, 2016 and 2015 and the
related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for
158
each of the three years in the period ended December 31, 2016 and our report dated March 14, 2017 expressed
an unqualified opinion thereon.
/s/ Elliott Davis Decosimo, PLLC
Charlotte, North Carolina
March 14, 2017
159
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, 2016.
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.
160
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, 2016, and audited the Company’s
effectiveness of internal control over financial reporting as of December 31, 2016, 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 2016 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.
161
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 (*).
2.1
2.2
2.3
2.4
2.5
2.6
3.a
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.
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.
Purchase and Assumption Agreement dated as of March 3, 2016 between First Bank (as Seller) and First
Community Bank (as Purchaser) was filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed on March 7, 2016, and is incorporated herein by reference.
Purchase and Assumption Agreement dated as of March 3, 2016 between First Community Bank (as
Seller) and First Bank (as Purchaser) was filed as Exhibit 99.3 to the Company’s Current Report on Form
8-K filed on March 7, 2016, and is incorporated herein by reference.
Merger Agreement between First Bancorp and Carolina Bank Holdings, Inc. dated June 21, 2016 was
filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 22, 2016, and is
incorporated herein by reference.
Termination Agreement Among the Federal Deposit Insurance Corporation, Receiver of Cooperative
Bank, Wilmington, North Carolina, and The Bank of Asheville, Asheville, North Carolina and First Bank
dated as of September 22, 2016 was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on September 22, 2016, and is incorporated herein by reference.
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
162
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.
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. (*)
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
Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. (*)
10.j
10.k
10.l
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. (*)
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. (*)
10.m
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,
163
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.n
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.o 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.p
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.q 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.r
10.s
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. (*)
Exchange Agreement by and between First Bancorp and Castle Creek Capital Partners IV, LP dated as of
December 22, 2016 was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
December 22, 2016, and is incorporated herein by reference.
12
Computation of Ratio of Earnings to Fixed Charges.
21
List of Subsidiaries of Registrant
23
Consent of Independent Registered Public Accounting Firm, Elliott Davis Decosimo, PLLC
31.1 Chief Executive Officer 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 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
302(a) of the Sarbanes-Oxley Act of 2002.
32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
101
The following financial information from the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated
Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of
Comprehensive Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated
Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
164
______________
(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.
165
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 2017.
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.
Executive Officers
/s/ Richard H. Moore
Richard H. Moore
Chief Executive Officer and Treasurer
March 14, 2017
Board of Directors
/s/ James C. Crawford, III
James C. Crawford, III
Chairman of the Board
Director
March 14, 2017
________________
Donald H. Allred
Director
March 14, 2017
/s/ Daniel T. Blue, Jr.
Daniel T. Blue, Jr.
Director
March 14, 2017
/s/ Mary Clara Capel
Mary Clara Capel
Director
March 14, 2017
________________
Abby J. Donnelly
Director
March 14, 2017
/s/ Michael G. Mayer
Michael G. Mayer
Director
March 14, 2017
166
/s/ Eric P. Credle
Eric P. Credle
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
March 14, 2017
/s/ Richard H. Moore
Richard H. Moore
Director
March 14, 2017
/s/ Thomas F. Phillips
Thomas F. Phillips
Director
March 14, 2017
/s/ O. Temple Sloan, III
O. Temple Sloan, III
Director
March 14, 2017
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
March 14, 2017
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
March 14, 2017
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
March 14, 2017
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