0 1
2017, A YEAR FOR THE
Dear Shareholders, Customers and Friends,
I am pleased to report that the year ended December 31, 2017 was an extraordinary
year for our company. Earnings were strong, and we completed strategic initiatives
that we believe position us uniquely in our two-state market area.
Earnings for the year ended December 31, 2017 amounted to $46.0 million, or
$1.82 per diluted share, a 36.8% increase in earnings per share over the $1.33 per
diluted share earned in 2016. Driven by two bank acquisitions discussed more below,
total assets grew by 54% during the year, with loans and deposits increasing by
approximately 50% each.
And the year was also a very good one for our shareholders, with a total return
of 31.4%. The company’s stock price has increased for six consecutive years and
generated a total return over that time period of 354%, or 23.5% on an annualized
basis. Also, I hope you saw our recent announcement that we have increased our
dividend by 25% in the first quarter of 2018.
Growing by Acquisition
On March 3, 2017, we completed the acquisition of Carolina Bank, headquartered in
Greensboro, North Carolina. Carolina Bank had eight branches in the Triad region of
North Carolina, with total assets of $682 million, including $497 million in loans and
$585 million in deposits.
In addition, on October 1, 2017, we completed the acquisition of Asheville Savings
S H A R E H O L D E R L E T T E R
Carolina Bank had eight
branches in the Triad
region of North Carolina,
with total assets of
$682 million, including
$497 million in loans and
$585 million in deposits.
26,694
A C C O U N T S C O N V E R T E D ,
I N C L U D I N G L O A N S A N D
M O R T G A G E S
1,806
C U S T O M E R C A L L S
F I E L D E D O N D AY O N E
Bank, which had 13 branches in and around Asheville, with
total assets of $798 million, including $606 million in loans
and $679 million in deposits.
With these two acquisitions, we took significant steps in
increasing our presence in areas of the state with higher
growth rates. When combined with our relatively recent
expansion into Charlotte and Raleigh, we now serve all of
the major metropolitan statistical areas of North Carolina.
North Carolina has recently experienced significant bank
consolidation. In 2017, large out-of-state banks acquired
several of our similar-sized competitors, leaving our
company as the only bank headquartered in North Carolina
with total assets between $4 billion and $30 billion. The
bigger banks tend to focus on large commercial business,
leaving First Bank uniquely positioned to serve individuals
and small-to-medium size businesses in our local
communities. We have over 80 years of experience serving
that market and will be working hard to capitalize on our
opportunities in 2018.
We also made a significant investment in our insurance
agency business during 2017, with the acquisition of Bear
Insurance Service, headquartered in Albemarle, North
Carolina. Bear Insurance serves many of our First Bank
markets in Albemarle and the surrounding area. Growing
and diversifying our revenue sources continues to be a
strategic goal of our company, and the addition of Bear
Insurance furthers that goal significantly.
Growing Internally
While acquisitions comprised the majority of our growth,
our organic growth was also strong. Excluding the
acquisitions noted earlier, loans grew by $228 million, or
8.4%, while deposits experienced growth of $195 million, or
6.6%. We believe the solid growth was a result of ongoing
internal initiatives to enhance loan and deposit growth. This
includes our recent expansion into higher growth markets,
and also our “Promise to Service Excellence” initiative
which is focused on employee training designed to provide
the best customer experience possible.
0 2
Giving Back
Included in this annual report are profiles of several winners
of our “Dream It. Do It.” contest. In this campaign, we
have been giving away $25,000 every three months to
help people realize their dreams. The contest is open
to anyone by visiting our website and creating an entry
that describes their dreams–creativity is encouraged. A
committee comprised of select First Bank employees and
a different local non-profit each quarter choose up to three
winners per quarter to share the $25,000. It has been very
rewarding to help make a life-changing impact on folks in
our communities.
Innovation
We continue to embrace innovations in technology, with
our most recent being an exciting new feature of our
mobile app that lets our customers send and receive
money. It’s called Cent™ and it is a simple way to quickly
send money to anyone, anywhere, with no fees. So, if you
don’t already have our mobile app, I encourage you to
download it and give Cent™ a try!
Looking Forward
Our commitment to service excellence when combined
with our 102 branches and $5 billion in assets gives our
company the credibility and scale to deliver what our
customers need to be successful. To our customers, thank
you for the privilege to serve, and to our shareholders,
thank you for the opportunity to grow your investment.
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
2 0 1 7 A N N U A L R E P O R T
When Dreams Come True, Communities Grow Stronger
Through the first three quarters of the “Dream It. Do It.” campaign, the contest has drawn more
than 3,000 entries from 426 cities and towns across the Carolinas. Roughly 25% of the entries were
seeking business funding or to support a local non-profit, and about 25% sought help with home
purchases or improvements for themselves or loved ones. The contest, which ends March 31, 2018,
has been a resounding success in raising awareness of First Bank and its full-service offerings.
Here are the stories of a few individuals whose dreams were realized.
FIRST BANK
WINNER SYMBOLS
S I LV E R I O H E R R E R A
Achieving the American dream
My husband works 70-80 hours a week laying concrete, and his dream is to
own his own concrete company. For that he needs a certain type of heavy
equipment–a used Skid Steer, which is a small front-end loader. His dream for
a company was delayed when our toddler son was diagnosed with cancer four
years ago. Through years of our child’s treatment, my husband has worked
tirelessly to pay for medical bills, traveling to specialists and supporting our
family. With this monetary gift he can acquire the equipment and launch his
own company, and earn more in support of our family and our son’s medical bills.
- J E N I H E R R E R A on behalf of Silverio Herrera
FIRST BANK
WINNER SYMBOLS
B R YA N B E N N E T T
Home for a hero
My brother is 32 years old and has been a Florence firefighter for half his life.
He volunteered for 10 years, was promoted to paid staff and he’s now Assistant
Chief for Howe Springs Fire Department. He worked rescue for 72 hours straight
during Hurricane Matthew, fundraises for injured co-workers and performs
training after hours as a volunteer. My brother works so hard and gives so much
to our community, but because of the limited salaries of firefighters and his
selfless contributions, he’s found it difficult to save enough money for a down
payment on a home for him and his fiancé. This hometown hero’s dream gift is to
acquire that down payment.
- M A N D Y S I M P S O N on behalf of Bryan Bennett
FIRST BANK
WINNER SYMBOLS
Our son, Anton, Jr., is a special child who suffers from ASD (Autism Spectrum
Disorder), which causes him severe anxiety around unfamiliar people, places
and even sudden light and noise. Bladen County does not offer any assistance
for individuals with ASD. Most of the time, my husband and I take turns with
appointments and grocery shopping due to our son’s inability to cope with
much of ordinary life. Our dream is to acquire an ASD service dog, which will
provide substantial support for everyday living and offer comfort from the
anxiety and coping with life issues that affect him so significantly. Thank you for
providing the possibility of making this dream a reality.
- A N I TA A U T R Y on behalf of Anton Autry, Jr.
A N I TA A U T R Y
A canine helper for my son
FIRST BANK
WINNER SYMBOLS
J A M I E A D A M S
Quality of life renovations
At three, our daughter Jamie developed Spinal Muscular Atrophy (SMA), which
causes the loss of motor neuron nerve cells in the spinal cord and results in atrophy
in Jamie’s muscles. She’s been in a wheelchair full-time since the age of five and is
currently unable to wash her hands in her own home without assistance. Our dream
is to add a handicap bathroom and bedroom downstairs in our two-story home
to help Jamie be more independent. We have been able to save about half the
funding, but the remaining has been a struggle and we are seeking help to make
this dream happen.
- J E S S I C A A D A M S on behalf of Jamie Adams
R E A D T H E F U L L S T O R I E S AT L O C A L F I R S T B A N K . C O M / D R E A M I T D O I T / W I N N E R S
0 5
2 0 1 7 A C Q U I S I T I O N S
Carolina
Bank
First Bank branches are now
open in the Triad and the
surrounding areas
13
28,000
Minutes of planning time
76%
Of new First Bank
customers have signed up
for online banking
Bear
Insurance
90+
Employees serving
all the Carolinas
3
New locations
in Stanly County
Asheville
Savings Bank
Acquired 13
October 1, 2017
Added First Bank
branches in Western
North Carolina
2017 BY THE
This year’s numbers add up to a higher profile and
bigger footprint for First Bank across North and
South Carolina. New acquisitions, new branches
and new associates reflect rapid growth, and
together with an expanded capacity for insurance
services, First Bank is poised to bring attentive,
full-service community banking to more and more
communities throughout the Carolinas.
A C Q U I S I T I O N S
0 6
Donald H. Allred
Daniel T. Blue, Jr.
Mary Clara Capel
James C. Crawford, III
C H A I R M A N F I R S T B A N C O R P
Suzanne DeFerie
Abby J. Donnelly
Chip Gould
Michael G. Mayer
P R E S I D E N T F I R S T B A N C O R P
Richard H. Moore
Thomas F. Phillips
O. Temple Sloan, III
Fredrick L. Taylor, II
C E O F I R S T B A N C O R P
Virginia C. Thomasson
Dennis A. Wicker
B O A R D O F D I R E C T O R S
Years Ended December 31
($ in thousands except share data)
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 share - basic
Earnings per share - diluted
Cash dividends declared - common
Market Price:
High
Low
Price on December 31
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
n/m = not meaningful.
2017
2016
CHANGE 2016
TO 2017
$ 164,711
723
48,908
145,157
21,767
45,972
-
45,972
$ 1.82
1.82
0.32
41.76
26.47
35.31
23.38
14.69
123,380
(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
$ 5,547,037
4,042,369
4,406,955
692,979
3,614,862
2,710,712
2,947,353
368,101
33.5%
n/m
91.4%
35.9%
48.8%
67.1%
n/m
68.2%
32.8%
36.8%
0.0%
46.6%
54.3%
30.1%
32.4%
6.1%
53.5%
49.1%
49.5%
88.3%
1.00%
8.62%
0.80%
7.73%
+ 20 bps
+ 89 bps
29,639,374
104
1,140
20,844,505
88
827
FIRST BANCORP
L O C A L F I R S T B A N K . C O M | 3 0 0 S W B R O A D S T. | S O U T H E R N P I N E S , N C 2 8 3 8 7
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, 2017
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)
[X] Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ] Smaller Reporting Company
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933
(§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter. [ ] Emerging growth
company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] YES [X] NO
1
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, 2017 as reported by The NASDAQ Global Select Market, was approximately $757,969,473.
The number of shares of the registrant’s Common Stock outstanding on February 28, 2018 was 29,654,718.
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
2
TABLE OF CONTENTS
Forward-Looking Statements
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5
Market for Registrant’s Common Stock, Related Shareholder Matters, and Issuer
Item 6
Item 7
Purchases of Equity Securities
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview – 2017 Compared to 2016
Overview – 2016 Compared to 2015
Outlook for 2018
Critical Accounting Policies
Merger and Acquisition Activity
FDIC Indemnification Asset
Statistical Information
Net Interest Income
Provision for Loan Losses
Noninterest Income
Noninterest Expenses
Income Taxes
Stock-Based Compensation
Distribution of Assets and Liabilities
Securities
Loans
Nonperforming Assets
Allowance for Loan Losses and Loan Loss Experience
Deposits
Borrowings
Liquidity, Commitments, and Contingencies
Capital Resources and Shareholders’ Equity
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Return on Assets and Equity
Interest Rate Risk (Including Quantitative and Qualitative Disclosures about
Market Risk)
Inflation
Current Accounting Matters
Item 7A
Item 8
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2017
Consolidated Statements of Comprehensive Income for each of the years in the three-
year period ended December 31, 2017
Consolidated Statements of Shareholders’ Equity for each of the years in the
three-year period ended December 31, 2017
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 2017
Begins on
Page(s)
5
5
22
32
32
32
32
32, 68
35, 68
36
38
40
41
43
43
44, 69
46, 79
47, 70
49, 71
50, 71
51
53, 72
54, 72
55, 74
56, 76
58, 78
60, 80
61
62, 82
63, 84
65
65, 83
65, 81
67
67
67
86
87
88
89
90
3
Notes to the Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Selected Consolidated Financial Data
Quarterly Financial Summary
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9
Disclosures
Item 9A
Item 9B
Controls and Procedures
Other Information
PART III
Item 10
Item 11
Item 12
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
Item 13
Item 14
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
PART IV
SIGNATURES
Begins on
Page(s)
91
145
68
85
148
148
149
149
149
149
149
149
149
153
*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s definitive
Proxy Statement for the 2018 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 2018.
4
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and
uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or
beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking
statements are intended to speak only as of the date made. Such statements are often characterized by the use of
qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements
concerning our opinions or judgment about future events. Our actual results may differ materially from those
anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure,
including many factors which are beyond our control. Factors that could influence the accuracy of such forward-
looking statements include, but are not limited to, the financial success or changing strategies of our customers, our
level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and
general economic conditions. For additional information about factors that could affect the matters discussed in this
paragraph, see the “Risk Factors” section in Item 1A of this report.
PART I
Item 1. Business
General Description
First Bancorp (the “Company”) is the fourth largest bank holding company headquartered in North Carolina. At
December 31, 2017, the Company had total consolidated assets of $5.5 billion, total loans of $4.0 billion, total
deposits of $4.4 billion, and shareholders’ equity of $0.7 billion. 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 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, 2017, we conducted
business from 104 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 several mortgage loan production offices in the
Triad Region of North Carolina (which includes Greensboro, High Point and Winston-Salem and the surrounding
areas). Of the Bank’s 104 branches, 98 branches are in North Carolina and six branches are in South Carolina. Ranked
by assets, the Bank was the fourth largest bank headquartered in North Carolina as of December 31, 2017.
As of December 31, 2017, 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 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,”
5
“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 residential mortgages through our
Mortgage Banking Division, and we offer SBA loans to small business owners across the nation through our SBA
Lending Division. 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 markets
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.”
We also offer various ancillary services as part of our commitment to customer service. Through First Bank Insurance,
we offer the placement of property and casualty insurance. We also offer 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 through our “investments division.”
First Bank also offers SBA loans to small business owners throughout the nation, which is supported by First Bank’s
subsidiary, 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.
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 became callable by the Company at par on any quarterly interest payment date beginning on
January 23, 2009. The interest rate on these debt securities adjusts on a quarterly basis at a 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 became callable by the Company at par on any quarterly interest payment
date beginning on June 15, 2011. The interest rate on these debt securities adjusts on a quarterly basis at a rate of
three-month LIBOR plus 1.39%.
The Company acquired Carolina Capital Trust in the March 3, 2017 acquisition of Carolina Bank Holdings, Inc. Carolina
Capital Trust was organized in December 2004 for the purpose of issuing $10.3 million in debt securities. These
borrowings are due on January 7, 2035 and are also structured as trust preferred capital securities that qualify as
6
regulatory capital. These debt securities became callable by the Company at par on any quarterly interest payment
date beginning on January 7, 2010. The interest rate on these debt securities adjusts on a quarterly basis at a rate of
three-month LIBOR plus 2.00%.
Territory Served and Competition
Our headquarters are located in Southern Pines, Moore County, North Carolina, where we have a significant
concentration of deposits. At the end of 2017, we served several regions across most of North Carolina, with
additional operations in northeastern South Carolina. The following table presents, for each county where we
operated as of December 31, 2017, 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, 2017, our approximate deposit
market share at June 30, 2017, and the number of bank competitors located in the county at June 30, 2017.
County
Alamance, NC
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
Henderson, NC (*)
Iredell, NC
Lee, NC
Madison, NC (*)
McDowell, 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
Transylvania, NC (*)
Wake, NC
Brokered Deposits
Total
Number of
Branches
1
1
2
1
4
11
2
2
2
1
2
1
1
2
3
3
2
4
5
3
2
3
3
1
1
2
2
10
5
2
1
3
1
4
1
1
1
4
1
3
-
104
Deposits
(in millions)
$ 49
14
55
34
159
558
46
36
45
44
45
26
18
116
62
143
54
74
448
113
67
75
188
39
59
26
138
462
187
72
9
142
50
182
24
57
78
101
25
53
234
$ 4,407
Market
Share
2.4%
6.3%
5.5%
9.6%
6.9%
13.8%
1.9%
3.0%
7.7%
11.0%
6.1%
0.5%
1.8%
3.3%
22.5%
20.5%
2.4%
0.3%
5.1%
11.2%
3.4%
2.7%
22.0%
24.2%
18.6%
0.0%
40.7%
31.1%
2.9%
6.6%
0.4%
9.8%
10.5%
18.7%
2.5%
4.5%
22.0%
10.7%
5.0%
0.2%
Number of
Competitors
14
4
7
5
11
16
11
8
9
6
5
14
8
10
4
6
12
16
16
9
13
19
9
3
5
25
2
10
20
10
14
11
5
8
10
13
6
6
6
31
(*) Pro forma information for market share and number of competitors is included as of June
30, 2017 to reflect the acquisition of Asheville Savings Bank, which occurred on October 1, 2017.
7
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 market. Leading producers of lumber and rugs are located in Montgomery
County, North Carolina. The Pinehurst area within Moore County, North Carolina, is a widely known golf resort and
retirement area. The High Point, North Carolina, area is widely known for its furniture market. New Hanover and
Brunswick Counties, located in the southeastern coastal region of North Carolina, are popular with tourists and have
significant retirement populations. Buncombe County, located in the western region of North Carolina, is a highly
diverse area with industries in manufacturing, service, and tourism. Additionally, several of the communities served
by the Bank 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, Greenville, 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 region 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 upgraded that location to a full service branch in April 2017. In the
Triad region, experienced bankers joined us in early 2016 as we opened our first loan production office in
Greensboro. Our expansion into higher growth markets was enhanced by three 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 March 2017, we acquired Carolina Bank Holdings, Inc. (“Carolina Bank”), the parent company of Carolina Bank.
Carolina Bank was a community bank headquartered in Greensboro with $682 million in assets, with eight branches
located in Greensboro, Winston-Salem, Burlington and Asheboro. This acquisition built on the Winston-Salem
expansion previously discussed and significantly accelerated our recent expansion initiative in the Greensboro
market.
In October 2017, we acquired ASB Bancorp, Inc. (“Asheville Savings Bank”), the parent company of Asheville Savings
Bank, SSB. Asheville Savings Bank operated in the attractive and high-growth market of Asheville, North Carolina,
with $798 million in assets and 13 branches located throughout the Asheville area.
As a result of the acquisitions of Carolina Bank and Asheville Savings Bank, the number of counties that are the home
to 10% or more of our deposit base has increased to three counties from one county a year earlier. Moore County,
the headquarters of the Company, has total deposits comprising approximately 10% of our deposit base, while
Guilford County, the former headquarters of Carolina Bank, also holds 10% of our deposit base and Buncombe
County, the former headquarters of Asheville Savings Bank, now holds 13% of our total deposit base. Accordingly,
material changes in competition, the economy or the population of these counties 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,
8
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 still 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 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. With the recent and expected interest rate increases initiated by the Board of Governors of the
Federal Reserve System (the “Federal Reserve”), the competitive pressure on increasing rates on deposits is
intensifying. Many of the markets we operate in are particularly competitive markets, with at least ten other financial
institutions having a physical presence within those markets.
We compete not only against banking organizations, but also against a wide range of financial service providers,
including federally and state-chartered thrift 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 loan providers, especially for
mortgage loans, and 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 who 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, 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.
9
We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action.
Lending and credit administration officers and the board of directors meet periodically to review past due loans and
portfolio quality, while assuring that the Bank is appropriately meeting the credit needs of the communities it serves.
Individual lending officers are responsible for monitoring any changes in the financial status of borrowers and
pursuing collection of early-stage past due amounts. For certain types of loans that exceed our 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, SBA
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. We are also authorized by our board of directors to invest a portion of our securities portfolio in
high quality corporate bonds, with the amount of such bonds not to exceed 15% of the entire securities portfolio.
Prior to purchasing a corporate bond, the Company’s management performs due diligence on the issuer of the bond,
and the purchase is not made unless we believe that the purchase of the bond bears no more risk to the Company
than would an unsecured loan to the same company.
Our Chief Investment Officer implements the investment policy, monitors the investment portfolio, recommends
portfolio strategies and reports to the Company’s Investment Committee. The Investment Committee generally
meets on a quarterly basis to review investment activity and to assess the overall position of the securities portfolio.
The Investment Committee compares our securities portfolio with portfolios of other companies of comparable size.
In addition, reports of all purchases, sales, issuer calls, net profits or losses and market appreciation or depreciation of
the securities portfolio are reviewed by our board of directors. Once a quarter, our interest rate risk exposure is
evaluated by our board of directors. Each year, the written investment policy is approved by the board of directors.
10
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 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. In both 2009 and
2011 we acquired the operations of failed banks in FDIC-assisted transactions. See the Company’s Annual Reports on
Form 10-K for those years for more information on these acquisitions.
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
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. To learn more about this subsidiary of the Bank, 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. 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.
11
In March 2017, we acquired Carolina Bank Holdings, Inc., the parent company of Carolina Bank, headquartered in
Greensboro, North Carolina, with approximately $682 million in assets. Carolina Bank operated 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 was a natural extension of our recent expansion into these high-
growth areas.
In September 2017, we acquired Bear Insurance Services, an insurance agency based in Albemarle, North Carolina.
Although not material to the Company’s consolidated operations, this acquisition provides us a larger platform for
leveraging insurance services throughout our bank branch network.
In October 2017, we acquired ASB Bancorp, Inc., the parent company of Asheville Savings Bank, headquartered in
Asheville, North Carolina, with approximately $798 million in assets. Asheville Savings Bank operated 13 branches in
the Asheville and surrounding areas. The acquisition complemented our existing presence in this attractive and high-
growth market.
There are many factors that we consider when evaluating how much to offer for potential acquisition candidates,
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.
Employees
As of December 31, 2017, we had 1,114 full-time and 52 part-time employees. We are not a party to any collective
bargaining agreements, and we consider our employee relations to be good.
Supervision and Regulation
As a bank holding company, we are subject to supervision, examination and regulation by the 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
12
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 those banking laws.
Regulatory authorities have cease and desist powers over bank holding companies and their nonbank subsidiaries
where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. Those
authorities may compel holding companies to invest additional capital into banking subsidiaries upon acquisitions or
in the event of significant loan losses or rapid growth of loans or deposits.
The United States Congress and the North Carolina General Assembly have periodically considered and adopted
legislation that has impacted the Company.
Supervision and Regulation of the Bank
Federal banking regulations applicable to all depository financial institutions, among other things: (i) provide federal
bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict preferential loans
by banks to “insiders” of banks; (iii) require banks to keep information on loans to major shareholders and executive
officers; and (iv) bar certain director and officer interlocks between financial institutions.
As a state-chartered bank, the Bank is subject to the provisions of the North Carolina banking statutes and to
regulation by the Commissioner. The Commissioner has a wide range of regulatory authority over the activities and
operations of the Bank, and the Commissioner’s staff conducts periodic examinations of the Bank and its affiliates to
ensure compliance with state banking laws and regulations and to assess the safety and soundness of the Bank.
Among other things, the Commissioner regulates the merger 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, 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. First Bank is a member of the
Federal Reserve System, and accordingly 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.
13
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 insured 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.
We recognized approximately $2.4 million, $2.0 million, and $2.4 million in FDIC insurance expense in 2017, 2016, and
2015, 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 would be assessed FDIC insurance
once the Deposit Insurance Fund (“DIF”) reached 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. In 2017, our FDIC insurance expense increased due to the acquisitions of
Carolina Bank and Asheville Savings Bank.
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.
14
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 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 are
examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has 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.
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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 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
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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, finalized a regulation to implement the Volcker
Rule. In January 2014, the same agencies adopted interim final regulations that permitted certain banking entities to
retain several types of investment that were to otherwise be prohibited under the Volcker Rule. The Volcker Rule
became effective in July 2015, with staggered dates in effect for banks to exit prohibited investments. 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, 2017.
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,
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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 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 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 thrift 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
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associated deferred tax liability, are now deducted from Common Equity Tier I Capital unless the banking
organization has unrestricted and unfettered access to such assets. Reciprocal cross-holdings of capital
instruments in any other financial institutions are now deducted from capital, not just holdings in other
depository institutions. For this purpose, financial institutions are broadly defined to include securities and
commodities firms, hedge and private equity funds and non-depository lenders. Banking organizations are
now also required to deduct non-significant investments (less than 10% of outstanding stock) in other
financial institutions to the extent these exceed 10% of Common Equity Tier I Capital subject to a 15% of
Common Equity Tier I Capital cap. Greater than 10% investments must be deducted if they exceed 10% of
Common Equity Tier I Capital. If the aggregate amount of certain items excluded from capital deduction due
to a 10% threshold exceeds 17.65% of Common Equity Tier I Capital, the excess must be deducted.
Changes in Risk-Weightings. The amended regulations continue to follow the 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 2008 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 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
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which would apply to the Company or the Bank. The federal bank regulators have not yet proposed rules to
implement the NSFR or addressed the scope of bank organizations to which it will apply.
Financial Privacy and Cybersecurity
The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to
disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure
of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain
personal information to a non-affiliated third party. These regulations affect how consumer information is
transmitted through diversified financial companies and conveyed to outside vendors. In addition, consumers may
also prevent disclosure of certain information among affiliated companies that is assembled or used to determine
eligibility for a product or service, such as that shown on consumer credit reports and asset and income information
from applications. Consumers also have the option to direct banks and other financial institutions not to share
information about transactions and experiences with affiliated companies for the purpose of marketing products or
services.
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates
that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure
that their risk management processes also address the risk posed by compromised customer credentials, including
security measures to reliably authenticate customers accessing Internet-based services of the financial institution.
The other statement indicates that a financial institution’s management is expected to maintain sufficient business
continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s
operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop
appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities
and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. 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 of a legal entity, including the
need to subject corporate borrowers to due diligence requests from financial institutions for certifications with
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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.
Tax Cuts and Jobs Act
U.S. tax reform legislation was signed into law in December 2017 and made broad and complex changes to the U.S.
Internal Revenue Code. The primary impact on our 2017 financial results was associated with the effect of reducing
the U.S. statutory tax rate from 35% to 21% on our deferred tax balances as of December 31, 2017. We were in a net
deferred tax liability position at December 31, 2017 and recorded a $1.3 million benefit in the fourth quarter by
lowering the net deferred liability and reducing income tax expense by the $1.3 million amount in the fourth quarter
of 2017.
Beginning January 1, 2018, we will apply a federal tax rate of 21% to our taxable earnings. Other provisions of U.S. tax
reform not effective until January 1, 2018, include, but are not limited to: 1) provisions reducing the dividends
received deduction; 2) essentially eliminating U.S. federal income taxes on dividends from foreign subsidiaries;
3) retaining an element of current inclusion of certain earnings of controlled foreign corporations; 4) eliminating the
corporate alternative minimum tax ("AMT") and 5) changing how existing AMT credits will be realized. Although we
continue to evaluate the impact of the tax reform, we don’t expect the changes, other than the change in the
statutory tax rate, will significantly impact our Company.
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.
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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 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, 2017 of $233.1
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 $221.4 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities,
including SBA Complete and our SBA lending division, with $4.3 million in goodwill. 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. Subject to the results of other valuation techniques, if the price of our common stock
falls below book value, 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 became effective in 2015 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.
On January 1, 2015, new rules under Basel III that substantially amended the regulatory risk-based capital rules
applicable to the Company and the Bank became effective. These new rules will be fully phased in by January 1, 2019.
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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, 2017:
a new common equity Tier 1 risk-based capital ratio of 5.75% (fully phased-in requirement of 7%);
a Tier 1 risk-based capital ratio of 7.25% (fully phased-in requirement of 8.5%);
a total risk-based capital ratio of 9.25% (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 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, 2017, we had 29,639,374 shares of common stock outstanding and had reserved for issuance 38,689
shares underlying options that are or may become exercisable at an average price of $16.09 per share. In addition, as
of December 31, 2017, we had the ability to issue 809,690 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.
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.
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The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing,
counterparty or other relationships. We have exposure to many different industries and counterparties, and we
routinely execute transactions with counterparties in the financial services industry, including brokers and dealers,
commercial banks, and investment banks. Defaults by, or even rumors or questions about, one or more financial
services companies, or the financial services industry generally, have led to market-wide liquidity problems and could
lead to losses or defaults by us or by other institutions. We can make no assurance that any such losses would not
materially and adversely affect our business, financial condition or results of operations.
We are subject to extensive regulation, which could have an adverse effect on our operations.
We are subject to extensive regulation and supervision from the North Carolina Commissioner of Banks and the
Federal Reserve. 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
24
characteristics. This mismatch can negatively impact net interest income if the margin between yields earned and
rates paid narrows. Interest rate environment changes can occur at any time and are affected by many factors that
are outside our control, including inflation, recession, unemployment trends, the Federal Reserve’s monetary policy,
domestic and international disorder and instability in domestic and foreign financial markets.
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable losses caused by
customer loan defaults. The allowance for loan losses may not be adequate to cover actual loan losses, and in this
case additional and larger provisions for loan losses would be required to replenish the allowance. Provisions for loan
losses are a direct charge against income.
We establish the amount of the allowance for loan losses based on historical loss rates, as well as estimates and
assumptions about future events. Because of the extensive use of estimates and assumptions, our actual loan losses
could differ, possibly significantly, from our estimate. We believe that our allowance for loan losses is adequate to
provide for probable losses, but it is possible that the allowance for loan losses will need to be increased for credit
reasons or that regulators will require us to increase this allowance. Either of these occurrences could materially and
adversely affect our earnings and profitability.
In addition, the measure of our allowance for loan losses is dependent on the adoption of new accounting standards.
The Financial Accounting Standards Board issued an Accounting Standards Update related to a new credit impairment
model, the Current Expected Credit Loss ("CECL") model, which will become effective on January 1, 2020 for the
Company. This new model 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 likely
require financial institutions like the Company 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;
25
·
·
·
·
·
·
·
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
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.
26
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
Treasury 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 past several years, the CFPB issued several rules on mortgage lending, notably a rule requiring all home
mortgage lenders to determine a borrower’s ability to repay the loan. Loans with certain terms and conditions and
that otherwise meet the definition of a “qualified mortgage” may be protected from liability to a borrower for failing
to make the necessary determinations. We may find it necessary to tighten our mortgage loan underwriting
standards in response to the CFPB rules, which may constrain our ability to make loans consistent with our business
strategies. It is our policy not to make predatory loans and to determine borrowers’ ability to repay, but the law and
related rules create the potential for increased liability with respect to our lending and loan investment activities.
27
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, thrifts, credit unions,
finance companies, brokerage firms, insurance companies and other financial intermediaries, such as online lenders
and banks. 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.
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
28
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 relatively 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.
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.
29
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.
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.
30
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.
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.
31
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The main offices of the Company and the Bank are located in a three-story building in the central business district of
Southern Pines, North Carolina and is owned by the Bank. 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, 2017, the Company operated 104 bank branches. The Company
owned all of its bank branch premises except nine branch offices for which the land and buildings are leased and 12
branch offices for which the land is leased but the building is owned. The Bank also leases five mortgage 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.
Item 4. Mine Safety Disclosure
Not applicable.
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 2017. 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, 2017, there were approximately 2,000
shareholders of record and another 8,000 shareholders whose stock is held in “street name.”
32
Additional Information Regarding the Registrant’s Equity Compensation Plans
At December 31, 2017, 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, 2017 regarding shares of the Company’s stock that may
be issued pursuant to the Company’s equity-based compensation plans. At December 31, 2017, the Company had no
warrants or stock appreciation rights outstanding under any compensation plans.
(a)
(b)
(c)
As of December 31, 2017
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))
38,689
─
38,689
$ 16.09
─
$ 16.09
809,690
─
809,690
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.
33
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the five-
year period commencing December 31, 2012 and ending December 31, 2017, 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, 2012 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, 2017
Total Return Performance
First Bancorp
Russell 2000 Index
SNL Bank $1B-$5B Index
350
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
First Bancorp
Russell 2000
SNL Index-Banks between $1
Total Return Index Values (1)
December 31,
2012
$ 100.00
100.00
2013
132.52
138.82
2014
149.90
145.62
2015
154.87
139.19
2016
227.84
168.85
2017
299.37
193.58
billion and $5 billion
100.00
145.41
152.04
170.20
244.85
261.04
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, 2012, reinvestment of dividends, and changes in market values. Total
return index numerical values used in this example are for illustrative purposes only.
34
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, 2017.
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,
2017 to October 31,
2017)
Month #2 (November 1,
2017 to November 30,
2017)
Month #3 (December 1,
2017 to December 31,
2017)
Total
___________________
(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. In December 2017, 872 shares of our common
stock, with a market price of $37.90 per share, were used to satisfy an exercise of options.
Item 6. Selected Consolidated Financial Data
Table 1 on page 68 of this report sets forth the selected consolidated financial data for the Company.
35
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 86 of this report and the supplemental financial data
contained in Tables 1 through 22 included with this discussion and analysis beginning on page 68 of this report.
Overview - 2017 Compared to 2016
We reported net income per diluted common share of $1.82 in 2017, a 36.8% increase compared to 2016. The
increased earnings were primarily due to the Company’s acquisitions of Carolina Bank and Asheville Savings Bank,
with loans increasing 49.1% and deposits increasing 49.5% year over year.
Financial Highlights
($ in thousands except per share data)
Earnings
Net interest income
Provision for loan losses - non-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
2017
2016
Change
$ 164,711
723
48,908
145,157
67,739
21,767
45,972
−
$ 45,972
123,380
(23)
25,551
106,821
42,133
14,624
27,509
(175)
27,334
33.5%
n/m
91.4%
35.9%
60.8%
48.8%
67.1%
68.2%
$ 1.82
1.82
1.37
1.33
32.8%
36.8%
$ 5,547,037
4,042,369
4,406,955
3,614,862
2,710,712
2,947,353
53.5%
49.1%
49.5%
1.00%
8.62%
4.08%
0.80%
7.73%
4.03%
The following is a more detailed discussion of our results for 2017 compared to 2016:
For the year ended December 31, 2017, we reported net income available to common shareholders of $46.0 million,
or $1.82 per diluted common share, an increase of 36.8% in earnings per share from the $27.3 million, or $1.33 per
diluted common share, in 2016. The higher earnings in 2017 were primarily the result of the growth of the Company,
including two acquisitions completed in 2017, as well as other initiatives that increased profitability.
On March 3, 2017, we acquired Carolina Bank Holdings, Inc., the parent company of Carolina Bank, which operated
eight branches and three mortgage loan offices, primarily in the Triad region of North Carolina. As of the acquisition
date, Carolina Bank had total assets of $682 million, including $497 million in loans and $585 million in deposits.
On October 1, 2017, we acquired ASB Bancorp, Inc., the parent company of Asheville Savings Bank, SSB,
headquartered in Asheville, North Carolina, which operated through 13 branches in the Asheville area. As of the
acquisition date, Asheville Savings Bank reported total assets of approximately $798 million, including $606 million in
loans and $679 million in deposits.
36
Net interest income for the year ended December 31, 2017 amounted to $164.7 million, a 33.5% increase from the
$123.4 million recorded in 2016. The increase in net interest income was primarily due to the acquisitions of Carolina
Bank and Asheville Savings Bank, as well as higher amounts of loans outstanding as a result of organic growth. 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 4.08% for 2017
compared to 4.03% for 2016. Asset yields have increased primarily as a result of three Federal Reserve interest rate
increases during the past year. Funding costs have also increased, but to a lesser degree.
We recorded a provision for loan losses of $0.7 million in 2017 compared to a negative provision for loan losses
(reduction of the allowance for loan losses) of $23,000 in 2016. The low level of provision for loan losses in both
years was primarily due to stable and improving loan quality. Our nonperforming assets to total assets ratio was
0.96% at December 31, 2017 compared to 1.64% at December 31, 2016. We experienced net loan charge-offs of $1.2
million in 2017, compared to $3.7 million in 2016. Annualized net charge-offs to average loans for the year ended
December 31, 2017 amounted to 0.04%, compared to 0.14% for 2016.
For the year ended December 31, 2017, noninterest income amounted to $48.9 million compared to $25.6 million for
2016. The primary reason for the increase in core noninterest income in 2017 was the acquisition of Carolina Bank
and Asheville Savings Bank, as well as income derived from the Company’s SBA consulting fees and SBA loan sale
gains, which began during the middle of 2016. See the section entitled “Noninterest Income” for additional
information.
Noninterest expenses for the year ended December 31, 2017 amounted to $145.2 million compared to $106.8 million
in 2016. The increase in noninterest expenses in 2017 related primarily to the Company’s acquisition of Carolina Bank
and Asheville Savings Bank. Also impacting expenses were other growth initiatives, including continued growth of the
Company’s SBA consulting firm and SBA lending division, as well as the acquisition of an insurance agency during the
third quarter of 2017. See the section entitled “Noninterest Expense” for additional information.
The Company’s effective tax rate for 2017 was 32.1% compared to 34.7% in 2016. The lower effective tax rate was
due to the 2017 Tax Cuts and Jobs Act, which was signed into law in December 2017. The impact to the Company of
revaluing its net deferred tax liability was to reduce income tax expense by approximately $1.3 million in the fourth
quarter of 2017. The Company expects to be favorably impacted in 2018 by the reduction in the federal tax rate, with
a projected effective tax rate of approximately 21%.
Total assets at December 31, 2017 amounted to $5.5 billion, a 53.5% increase from a year earlier. Total loans at
December 31, 2017 amounted to $4.0 billion, a 49.1% increase from a year earlier, and total deposits amounted to
$4.4 billion at December 31, 2017, a 49.5% increase from a year earlier.
In addition to the growth realized from the acquisitions of Carolina Bank in March 2017 and Asheville Savings Bank in
October 2017, the Company experienced strong organic loan and deposit growth during 2017. For 2017, organic loan
growth (i.e. excluding loan balances assumed from Carolina Bank and Asheville Savings Bank) amounted to $228.0
million, or 8.4%. For 2017, organic deposit growth amounted to $195.1 million, or 6.6%. The strong growth was a
result of ongoing internal initiatives to enhance loan and deposit growth, including the Company’s recent expansion
into higher growth markets. The organic loan growth noted above has been driven by the recently-entered North
Carolina markets of Charlotte, Raleigh, and the Triad.
37
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
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent)
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%
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.
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 were 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
38
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 were 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. In the second half 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.
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
39
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.
Outlook for 2018
We generally believe that the outlook for 2018 is favorable. We expect the national economy, as well as our local
economies, to continue to improve, with unemployment rates remaining at low levels. We believe that the recent tax
reform is likely to result in future economic growth, and the lower statutory tax rate will benefit our Company.
The Federal Reserve has increased short-term interest rates by 125 basis points since late 2015, with more increases
projected. Longer-term interest rates, while still low, have begun to increase. Generally, higher interest rates can be
favorable for banks like us. We are able to earn higher yields on our interest-earning assets, while our funding costs
may reprice at a lag to the interest rate changes in the market, and potentially not to the full amount of the rate
increases. However interest rates on loans continue to be impacted by intense competition, and we are beginning to
experience pressure on the rates we pay on deposits. Thus the stability of our net interest margin is uncertain.
With several consecutive years of significantly improved trends of nonperforming assets and lower loan charge-offs
compared to the recessionary years, we again recorded low levels of provisions for loan losses in 2017, which brought
our overall allowance for loan loss level down significantly following the elevated amounts we maintained during and
immediately following the recession. As stated in Note 20 to the consolidated financial statements, from January 1,
2018 through February 28, 2018, we have recorded net loan recoveries of $3.3 million. With other asset quality
measures expected to remain stable, we currently expect our levels of provisions for loan losses to remain low in
2018.
Excluding our two whole-bank acquisitions in 2017, we experienced solid organic loan and deposit growth in 2017.
Our local economies have continued to improve, and we experienced positive results from our recent expansion into
the larger and higher growth markets in North Carolina. With our expanded market areas due to acquisitions and
other strategic initiatives, we expect to experience continued loan and deposit growth in 2018.
40
Critical Accounting Policies
The accounting principles we follow and our methods of applying these principles conform with accounting principles
generally accepted in the United States of America and with general practices followed by the banking industry.
Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on
our best assumptions at the time of the estimation. The allowance for loan losses, intangible assets, and the fair
value and discount accretion of acquired loans are three policies we have identified as being more sensitive in terms
of judgments and estimates, taking into account their overall potential impact to our consolidated financial
statements.
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts involved, we have identified the
accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to
our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to
bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the
portfolio.
Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the
appropriate allowance for loan losses. This model has two components. The first component involves the estimation
of losses on individually evaluated “impaired loans.” A loan is considered to be impaired when, based on current
information and events, it is probable we will be unable to collect all amounts due according to the contractual terms
of the original loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan
balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled
debt restructured status, purchased credit impaired status, and type of collateral) and the loan is determined to be
impaired. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the
value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from
the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of
the collateral.
The second component of the allowance model is an estimate of losses for all loans not considered to be impaired
loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk grade and
estimated loss percentages are assigned to each loan pool based on historical losses. The historical loss percentages
are then adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not
captured by historical data.
The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for general
reserve loans. This becomes our “allocated allowance.” The allocated allowance is compared to the actual allowance
for loan losses recorded on our books and any adjustment necessary for the recorded allowance to absorb losses
inherent in the portfolio is recorded as a provision for loan losses. The provision for loan losses is a direct charge to
earnings in the period recorded. Any remaining difference between the allocated allowance and the actual allowance
for loan losses recorded on our books is our “unallocated allowance.”
Purchased loans are recorded at fair value at the acquisition date. Therefore, amounts deemed uncollectible at the
acquisition date represent a discount to the loan value and become a part of the fair value calculation. Subsequent
decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in
the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income
over the life of the loan and this accretion is referred to as “loan discount accretion.”
Within the purchased loan portfolio, loans are deemed purchased credit impaired at acquisition if the bank believes it
will not be able to collect all contractual cash flows. Performing loans with an unamortized discount or premium that
are not deemed purchased credit impaired are considered to be purchased performing loans. Purchased credit
impaired loans are individually evaluated as impaired loans, as described above, while purchased performing loans
41
are evaluated as general reserve loans. For purchased performing loan pools, any computed allowance that is in
excess of remaining net discounts is a component of the allocated allowance.
Although we use the best information available to make evaluations, future material adjustments may be necessary if
economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review our allowance for loan losses. Such agencies may require us to
recognize additions to the allowance based on the examiners’ judgment about information available to them at the
time of their examinations.
For further discussion, see “Nonperforming Assets” and “Summary of Loan Loss Experience” below.
Intangible Assets
Due to the estimation process and the potential materiality of the amounts involved, we have also identified the
accounting for intangible assets as an accounting policy critical to our consolidated financial statements.
When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair
market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset.
We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as
goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated
life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized.
Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to
identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be
identifiable intangible assets and a lower amount classified as goodwill.
The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch
acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency or a consulting
firm, as we did in 2016 and 2017, the primary identifiable intangible asset is the value of the acquired customer list.
Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and
estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of
any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs,
and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and
bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life
ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the
identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with
amortization occurring on a straight-line basis. For the SBA consulting firm we acquired in 2016, the identifiable
intangible asset related to the customer list was determined to have a life of approximately seven years, with
amortization occurring on a straight-line basis.
Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable
intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis,
goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value,
including goodwill. We have three reporting units – 1) First Bank with $221.4 million in goodwill, 2) First Bank
Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA lending division,
with $4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would
determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the
carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an
impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow
analysis would involve the significant use of estimates and assumptions.
In our 2017 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units was not
impaired.
42
We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the
difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future
cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple
estimates and assumptions, such as those listed above.
Fair Value and Discount Accretion of Acquired Loans
We consider the determination of the initial fair value of acquired loans and the subsequent discount accretion of the
purchased loans to involve a high degree of judgment and complexity.
We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant
accounting guidance. However, the amount that we realize on these assets could differ materially from the carrying
value reflected in our financial statements, based upon the timing of collections on the acquired loans in future
periods. Because of inherent credit losses and interest rate marks associated with acquired loans, the amount that
we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the
borrowers, with the difference being referred to as the “discount” on the acquired loans. For non-impaired
purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for
accounting for loan origination fees and costs.
For purchased credit-impaired (“PCI”) loans, the excess of the cash flows initially expected to be collected over the
fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the
estimated remaining life of the loans using the effective yield method, provided that the timing and the amount of
future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are
considered to be accruing because their interest income relates to the accretable yield recognized under accounting
for PCI loans and not to contractual interest payments. The difference between the contractually required payments
and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as
the nonaccretable difference.
Subsequent to an acquisition, estimates of cash flows expected to be collected are updated periodically based on
updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market
conditions. If there is a decrease in cash flows expected to be collected, the provision for loan losses is charged,
resulting in an increase to the allowance for loan losses. If the Company has a probable increase in cash flows
expected to be collected, we will first reverse any previously established allowance for loan losses and then increase
interest income as a prospective yield adjustment over the remaining life of the loan. The impact of changes in
variable interest rates is recognized prospectively as adjustments to interest income.
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. In
2017, we completed two full-bank acquisitions – Carolina Bank and Asheville Savings Bank. Also in 2017, we
completed the acquisition of another insurance agency headquartered in Albemarle, North Carolina.
See Note 2 to the consolidated financial statements for additional information regarding these acquisitions.
FDIC Indemnification Asset
As previously discussed, in 2009 and 2011, we acquired substantially all of the assets and liabilities of two failed banks
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. One of
these loss share agreements expired in July 2014 and one agreement expired in April 2016. On September 22, 2016,
43
we reached a mutual agreement with the FDIC to terminate all loss share agreements, with all future losses and
recoveries associated with these failed bank assets being fully borne by the Bank.
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 $164.7 million in 2017, $123.4 million in 2016, and $119.7
million in 2015. 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 $167.3 million in 2017, $125.4 million in 2016, and $121.4
million in 2015. Management believes that analysis of net interest income on a tax-equivalent basis is useful and
appropriate because it allows a comparison of net interest amounts in different periods without taking into account
the different mix of taxable versus non-taxable investments that may have existed during those periods. The
following is a reconciliation of reported net interest income to tax-equivalent net interest income.
($ in thousands)
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
Year ended December 31,
2017
$ 164,711
2,590
$ 167,301
2016
123,380
2,054
125,434
2015
119,747
1,634
121,381
Table 2 analyzes net interest income on a tax-equivalent basis. Our net interest income on a tax-equivalent basis
increased by 33.4% in 2017 and increased by 3.3% in 2016. 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 2017 compared to 2016 was primarily due to growth in our loans outstanding
(acquired and organic), with a five basis point increase in our net interest margin also contributing to the increase.
For 2017, average loans increased $817.6 million, or 31.4%, with interest income earned on loans increasing by $42.4
million over 2016. Average deposits also increased significantly at 30.7%, but interest expense on deposits only
increased by $2.4 million over 2016.
Our net interest margin increased from 4.03% in 2016 to 4.08% in 2017. Asset yields increased primarily as a result of
three Federal Reserve interest rate increases during the past year. Funding costs also increased, but to a lesser
degree.
Increases in asset yields were partially offset by increased funding costs in 2017. The average interest rate paid on
our interest bearing deposits increased from 0.24% in 2016 to 0.28% in 2017, which is mainly due to a higher level of
brokered deposits over the past year, which are generally more expensive than retail deposits. Our average
borrowings also increased in 2017 by $116.2 million, or 55.4%, with interest expense on borrowings increasing $2.7
million over 2016. The higher reliance on brokered deposits and borrowings was due primarily to strong loan growth
that outpaced core funding growth.
The increase in net interest income in 2016 compared to 2015 was 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.
44
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%.
Our net interest margin declined from 4.13% in 2015 to 4.03% in 2016. Lower asset yields were the primary factor
causing the decline in the net interest margin in 2016, as the yield we earned on our interest-earning assets declined
from 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 were the primary factors in this decline.
For 2016, the declines in asset yields were partially offset by lower liability costs, as we were able to progressively
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 0.26% in 2015 to 0.24% in 2016. Also, for 2016, 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, increased from $2.0 billion in 2015 to $2.2 billion in 2016, an increase
of 10%, while the average amount of our higher cost funding, comprised of time deposits, remained stable at
approximately $0.7 billion over that same period.
The net interest margin for all periods benefited, by varying amounts, from the net accretion of purchase accounting
premiums/discounts associated with acquisitions. As can be seen in the table below, we recorded $7.3 million in
2017, $4.5 million in 2016, and $4.8 million in 2015, in net accretion of purchase accounting premiums/discounts that
increased net interest income.
($ in thousands)
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Interest income – increased by accretion of loan discount
Interest expense – reduced by premium amortization of deposits
Interest expense – increased by discount accretion of borrowings
Impact on net interest income
$ 7,076
384
(148)
$ 7,312
4,451
77
−
4,528
4,751
−
−
4,751
The biggest component of the purchase accounting adjustments in each year was loan discount accretion, which
amounted to $7.1 million in 2017, $4.5 million in 2016, and $4.8 million in 2015. In 2017, the increase in loan
discount accretion is primarily due to the loan discounts recorded in the acquisitions of Carolina Bank and Asheville
Savings Bank. During 2017, we recorded an additional $20.7 million in loan discounts related to these acquisitions.
Unaccreted loan discount increased from $12.7 million at December 31, 2016 to $26.9 million at December 31, 2017.
Unaccreted loan discount declined from $20.8 million at January 1, 2015 to $12.7 million at December 31, 2016. We
expect loan discount accretion to increase in 2018 as a result of the newly acquired loan portfolios being held by the
Bank for a full-year.
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 2016 and 2017. In 2017, we acquired
Carolina Bank and Asheville Savings Bank, which significantly increased our volumes for loans and deposits. For 2017,
higher loan volume positively impacted interest income by $38.6 million, and higher loan interest rates positively
impacted interest income by $3.8 million, with the combined effect driving the total increase in interest income of
$46.9 million. Higher volumes and higher rates paid on deposits drove an increase of $2.4 million in interest expense.
A higher level of borrowings and higher rates paid on those borrowings in 2017 also contributed significantly to the
$5.1 million increase in interest expense. The higher level of borrowings was necessary in 2017 in order to fund our
organic loan growth, which outpaced deposit growth. Overall, as the table indicates, net interest income on a tax-
equivalent basis grew $41.9 million in 2017.
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
45
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.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
Provision for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an
estimated balance considered appropriate to absorb probable losses inherent in our loan portfolio. Management’s
determination of the adequacy of the allowance is based on our level of loan growth, an evaluation of the loan
portfolio, current economic conditions, historical loan loss experience and other risk factors.
For 2017, we recorded total provision for loan losses of $723,000. In 2016, we recorded total negative provisions for
loan losses (reduction of allowance for loan losses) of $23,000. For 2015, our total provisions for loan losses were
$780,000.
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 $0.7 million, $2.1 million, and $2.0 million in provisions for loan losses related to non-covered loans for
the years ended December 31, 2017, 2016, and 2015, respectively. These relatively low amounts were the result of a
prolonged period of stable and improving loan quality trends, which resulted in lower provisions for loan losses that
were 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. This same situation continued in 2016 and 2017 and was further impacted by net charge-offs that declined
significantly in 2016 and again in 2017. These factors combined to result in a provision for non-covered loan losses
that only slightly increased to $2.1 million in 2016 and decreased to $0.7 million in 2017 despite higher loan growth in
both periods. As stated in Note 20 to the consolidated financial statements, from January 1, 2018 through February
28, 2018, we have recorded net loan recoveries of $3.3 million. With other asset quality measures expected to
remain stable, we currently expect our levels of provisions for loan losses to remain low in 2018.
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. 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.
Total net charge-offs (covered and non-covered) for the years ended December 31, 2017, 2016, and 2015, were $1.2
million, $3.7 million, and $11.3 million, respectively.
Net-charge offs of non-covered loans were $1.2 million, $5.4 million, and $13.6 million for 2017, 2016, and 2015,
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.
46
Net charge-offs (recoveries) of covered loans were ($1.7 million) and ($2.3 million) in 2016 and 2015, respectively,
with several large recoveries significantly impacting 2015 and 2016.
As seen in Table 14, in 2017, 2016 and 2015, net charge-offs were highest in our residential first mortgages, which is
reflective of the size of our residential first mortgage portfolio and continued challenging economic conditions in
some of our more rural market areas. In 2013 and 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 $48.9 million in 2017, $25.6 million in 2016, and $18.8 million in 2015.
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 $49.3 million in 2017, a 40.9% increase from the $35.0 million recorded in
2016. The 2016 core noninterest income of $35.0 million was a 19.3% increase from the $29.3 million recorded in
2015.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
For most categories of noninterest income, our acquisitions of Carolina Bank in March 2017 and Asheville Savings
Bank in October 2017 had the effect of increasing noninterest income in 2017 in comparison to 2016.
Service charges on deposit accounts amounted to $11.9 million, $10.6 million, and $11.6 million in 2017, 2016 and
2015, respectively. In 2017, the increase is primarily due to the aforementioned acquisitions. In 2017, 2016 and
2015, fewer instances of fees earned from customers overdrawing their accounts negatively 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 $14.6 million in 2017, a 22.6% increase from the $11.9
million earned in 2016. The 2016 amount of $11.9 million was 9.2% higher than the $10.9 million earned in 2015.
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 increase
in this line item in 2017 was due to a combination of the Carolina Bank and Asheville Savings Bank acquisitions, as
well as growth in interchange fees from debit and credit cards. In both 2017 and 2016, increased debit card usage by
our customers has increased income, as we earn a small fee each time our customers make a debit card transaction.
Interchange income from credit cards has also increased due to growth in the number and usage of credit cards,
which we believe is a result of increased promotion of this product.
Fees from presold mortgages amounted to $5.7 million in 2017, $2.0 million in 2016, and $2.5 million in 2015. In
2017, the increases were primarily due to the acquisition of Carolina Bank in March 2017, which had a significant
mortgage loan operation. In 2016, fewer mortgage loan originations resulted in decreases in these fees. Also, fewer
47
mortgage loans were sold to the secondary market in 2016 compared to 2015 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 $5.3 million in 2017, $3.8 million in 2016,
and $2.6 million in 2015. This line item includes commissions we receive from two primary sources - 1) commissions
from the sales of investment, annuity, and long term care insurance products, and 2) commissions from the sale of
property and casualty insurance. The following table presents the contribution of each source to the total amount
recognized in this line item:
($ in thousands)
Commissions earned from:
Sales of investments, annuities, and long term care insurance
Sales of property and casualty insurance
Total
For the year ended December 31,
2017
2016
2015
$ 2,152
2,027
3,148
$ 5,300
1,763
3,790
1,934
646
2,580
As can be seen in the above table, sales of property and casualty insurance increased significantly in 2016 and again in
2017, which is due to our January 1, 2016 acquisition of Bankingport, Inc., an insurance agency located in Sanford,
North Carolina and our September 1, 2017 acquisition of Bear Insurance Services, an insurance agency headquartered
in Albemarle, 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.
Another primary reason for the increases in core noninterest income in 2017 and 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 2016. In 2017, we recorded $4.0 million
in SBA consulting fees and $5.5 million in gains on the sales of SBA loans. The SBA division originated $95.4 million in
loans in 2017.
Table 4 shows earnings from bank-owned life insurance income were $2.3 million in 2017, $2.1 million in 2016, and
$1.7 million in 2015. In 2017, we acquired approximately $23 million in bank-owned life insurance from Carolina Bank
and Asheville Savings Bank, increasing our income for this line item. In the fourth quarter of 2015, we purchased
$15.0 million in bank-owned life insurance on certain officers of our Company, which increased our income for this
line item in 2016.
Noninterest income not considered to be “core” resulted in net reductions to total noninterest income of $0.4 million
in 2017, $9.4 million in 2016, and $10.6 million in 2015. 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 $0.5 million in 2017, $1.5 million in 2016, and $2.5
million in 2015. These losses have resulted from ongoing declines in property values for certain types of properties.
Prior to the termination of the loss share agreements in September 2016, we recorded $0.9 million and $1.0 million of
net gains on covered foreclosed properties in 2016 and 2015, respectively. 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.
48
For the years ended December 31, 2016 and 2015, indemnification asset expense amounted to $10.3 million and $8.6
million, 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). 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,
2016
$ (2.0)
(1.6)
(0.7)
(5.7)
(0.3)
$ (10.3)
2015
(5.6)
(2.3)
(0.4)
̶
(0.3)
(8.6)
In 2017, we recorded losses on sales of securities of $0.2 million. Securities gains (losses) were insignificant for 2016
and 2015.
“Other gains (losses), net” for the 2017, 2016 and 2015 periods presented represent the net effects of miscellaneous
gains and losses that are non-routine in nature. In 2016, the Company recorded a net gain of $1.5 million as a result
of a branch exchange transaction with First Community Bank (see Note 2 of the consolidated financial statements for
additional discussion).
Noninterest Expenses
Total noninterest expenses totaled $145.2 million, $106.8 million, and $98.1 million for 2017, 2016 and 2015,
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 2017 and 2016 was associated with our growth initiatives, including
several acquisitions, including Carolina Bank and Asheville Savings Bank, and market expansion. Line items with the
largest fluctuations are further discussed below.
Total personnel expense increased from $62.1 million in 2016 to $81.2 million in 2017, an increase of $19.1 million, or
30.8%. Within personnel expense, salaries expense increased $15.5 million in 2017 and employee benefits expense
increased by $3.6 million in 2017. The primary reason for these increases in personnel expense is due to the
additional personnel assumed in the Carolina Bank and Asheville Savings Bank acquisitions. Also, in 2017, we have
added personnel due to the continued growth of the SBA consulting firm and our SBA national lending division.
Additionally, salary expense for the fourth quarter of 2017 was also impacted by approximately $1.1 million related to
one-time bonuses granted to a majority of the Company’s employees. Effective January 1, 2018, the Company
increased its 401k match from effectively a 100% match up to 4% of an employee’s salary contribution to a 100%
match up to 6% of an employee’s salary contribution. The higher match is expected to have an approximately $0.8
million impact on employee benefits expense.
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 2016 in personnel expense was 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 the Triad region of North Carolina.
49
Net occupancy expenses amounted to $9.7 million in 2017, $7.8 million in 2016, and $7.4 million in 2015. The
increases in 2017 and 2016 were related to the aforementioned acquisitions and expansion initiatives.
Equipment related expenses amounted to $4.5 million, $3.6 million, and $3.7 million, in 2017, 2016, and 2015,
respectively, with the increase in 2017 being attributed to the 2017 acquisitions.
Merger and acquisition expenses amounted to $8.1 million in 2017 and $1.4 million in 2016 compared to none in
2015. The 2017 amount was primarily comprised of professional fees and severance costs incurred in our acquisitions
of Carolina Bank and Asheville Savings Bank. In 2016, the amount was comprised of professional fees incurred for our
various acquisitions, including Bankingport, SBA Complete, our branch exchange, and our agreement to acquire
Carolina Bank that was announced in 2016.
Intangible amortization expense increased from $1.2 million in 2016 to $4.2 million in 2017 due to the addition of
$22.5 million in amortizable intangible assets recorded in connection with the acquisitions of Carolina Bank, Asheville
Savings Bank, and Bear Insurance Services. Intangible amortization expense increased from $0.7 million in 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 $2.4 million in 2017, $2.0 million in 2016, and $2.4 million in 2015. 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. The increase in 2017 was due to the acquisitions of
Carolina Bank and Asheville Savings Bank.
Outside consultant expense amounted to $2.5 million in 2017, and $1.7 million in both 2016 and 2015. The increase
in 2017 related to various operational activities.
Data processing expenses amounted to $2.9 million, $2.0 million, and $1.9 million in 2017, 2016, and 2015,
respectively. In 2017, our expense was higher due to the acquisitions of Carolina Bank and Asheville Savings Bank.
For a period of time following each acquisition until a systems conversion, the Bank incurs the expense of running two
data processing systems. For Carolina Bank, this period was from March 3, 2017 to August 4, 2017. For Asheville
Savings Bank, this period is from October 1, 2017 to March 16, 2018.
Marketing expense increased to $2.5 million in 2017, from $2.0 million in 2016 and $1.7 million in 2015. In 2017, we
increased our promotional efforts, primarily in our new and expanded market areas.
Non-credit losses amounted $0.9 million in 2017, $1.2 million in 2016, and $0.3 million in 2015. The increase in 2016
was primarily due to higher debit card and credit card fraud losses. In 2017, we incurred fewer losses as we rolled out
new debit and credit cards in late 2016 and 2017, which had additional fraud-resistant security features.
Income Taxes
Table 6 presents the components of income tax expense and the related effective tax rates. We recorded income tax
expense of $21.8 million in 2017, $14.6 million in 2016, and $14.1 million in 2015. Our effective tax rates were 32.1%
for 2017, 34.7% for 2016, and 34.3% for 2015. Due to the 2017 Tax Cuts and Jobs Act that was signed into law on
December 22, 2017, our federal statutory income tax rate was reduced from 35% to 21%. Accordingly, we revalued
our net deferred tax liability and reduced income tax expense by $1.3 million, which reduced our effective tax rate for
2017.
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 in 2016.
50
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 5.0% in 2015 to 4.0% in 2016 to 3.0% in
2017. We expect our effective tax rate to be approximately 21.0% in 2018.
Stock-Based Compensation
We recorded stock-based compensation expense of $1.1 million, $0.7 million, and $0.7 million, for the years ended
December 31, 2017, 2016, and 2015, respectively. The increase in this expense from 2016 to 2017 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.
51
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
At December 31, 2017, our total assets amounted to $5.5 billion, a 53.5% increase from 2016. As previously
discussed, our significant growth is due to the acquisition of Carolina Bank and Asheville Savings Bank in 2017. The
following table presents detailed information regarding the nature of changes in our loans and deposits in 2016 and
2017:
($ in thousands)
2017
Balance at
beginning of
period
Internal
growth,
net (1)
Growth from
Acquisitions
(2) (3)
Transfer due
to Expiration
&
Termination
of Loss Share
Agreements
Loans outstanding
$ 2,710,712
227,955
1,103,702
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
2016
Loans – Non-covered
Loans – Covered
Total loans outstanding
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
________________________________
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
159,493
13,847
23,013
(5,174)
57,554
(3,253)
(12,631)
(37,765)
195,084
196,789
(6,517)
190,272
90,807
12,793
55,987
14,263
60,054
(33,164)
(41,751)
158,989
280,665
234,976
276,129
250,960
45,639
11,248
72,554
92,347
1,264,518
1,514
−
1,514
6,158
(4,240)
(8,999)
8,195
−
(8,716)
(15,319)
(22,921)
Balance at
end of
period
Total
percentage
growth
Internal
percentage
growth (1)
4,042,369
49.1%
8.4%
−
−
−
−
−
−
−
−
−
−
1,196,161
884,254
982,822
454,860
239,659
7,995
347,862
293,342
4,406,955
58.2%
39.2%
43.8%
117.6%
75.6%
n/m
20.8%
22.9%
49.5%
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
14.7%
1.4%
7.4%
12.0%
78.6%
-12.7%
-19.3%
4.8%
21.1%
2.2%
3.4%
-2.5%
42.2%
n/m
-4.4%
-15.8%
6.6%
8.1%
-6.3%
7.6%
13.8%
2.0%
8.8%
7.6%
78.6%
-10.1%
-14.1%
5.7%
(1) For 2016, 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. For 2016 and 2017, excludes the
impact of acquisitions in the year of acquisition, but includes growth or declines in acquired operations after the date of acquisition.
(2) For 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 column represents the net difference in what we received
compared to what we sold.
(3) For the 2017 period, we acquired Carolina Bank, which had $497.5 million in loans and $585.4 million in deposits. We also acquired Asheville
Savings Bank, which had $606.2 million in loans and $679.1 million in deposits.
n/m – not meaningful
As derived from the table above, in 2017, our total loans outstanding increased $1.3 billion, or 49.1%. The loan
growth from acquisitions is due to our acquisition of Carolina Bank in March 2017, which had $497.5 million in loans
on the date of acquisition, and our acquisition of Asheville Savings Bank in October 2017, which had $606.2 million in
loans on the date of acquisition. Carolina Bank operated through eight branches predominately in the Triad region of
North Carolina, and Asheville Savings Bank operated through 13 branches in the Asheville area of North Carolina. We
expect these acquisitions to complement our strategic initiatives in these attractive and high-growth markets.
52
Internal growth in our loan portfolio amounted to $228.0 million, or 8.4%. Internal loan growth has been primarily
driven by our recent expansion into high-growth markets and the hiring of experienced bankers in these areas. We
expect continued growth in our loan portfolio for 2018.
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.
During 2017, we experienced an increase in total deposits of $1.5 billion, or 49.5%. In 2017, we acquired $585.4
million in deposits from the Carolina Bank acquisition and $679.1 million in deposits from the Asheville Savings Bank
acquisition. Net internal deposit growth amounted to $195.1 million, or 6.6%. We experienced internal growth of
$191.2 million in our core deposit accounts, compared to net declines of $50.4 million in our retail time deposits,
excluding brokered and internet deposits. Total brokered deposits amounted to $239.7 million at December 31,
2017, which is a 75.6% increase from the $136.5 million outstanding a year earlier. We increased our reliance of
brokered deposits in 2017 to assist in funding the strong organic loan growth we experienced during 2017.
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.
Our overall liquidity was substantially the same at December 31, 2017 compared to a year earlier. Our liquid assets
(cash and securities) as a percentage of our total deposits and borrowings was 20.0% at December 31, 2017
compared to 19.8% at December 31, 2016.
At December 31, 2017, our nonperforming assets to total assets ratio was 0.96% compared to 1.64% at December 31,
2016. 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, 2017,
2016, and 2015.
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 88%-
91%. Intangible assets increased from 2% of total assets in 2015 and 2016 to 5% as of December 31, 2017, primarily
as a result of our two whole-bank acquisitions in 2017, in which we recorded a total of $153.9 million in goodwill and
$18.6 million in other intangible assets.
On the liability side, in 2016 and 2017, we obtained additional borrowings to help fund the loan growth that we
experienced during those years that increased its percentage from 5% to 7%. Deposits decreased from 84% of total
liabilities and shareholder’s equity at December 31, 2015 to 80% at December 31, 2017.
Shareholders’ equity increased from 10% of total liabilities and shareholders’ equity at December 31, 2015 and 2016
to 12% at December 31, 2017 due to the common stock issued in connection with our 2017 acquisitions.
53
Securities
Information regarding our securities portfolio as of December 31, 2017, 2016, and 2015 is presented in Tables 8 and
9.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate
level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a
balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the
investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain
deposits. We obtain fair values for the vast majority of our investment securities from a third-party investment
recordkeeper, who specializes in securities purchases and sales, recordkeeping, and valuation. This recordkeeper
provides us with a third-party report that contains an evaluation of internal controls that includes testwork of
securities valuation. We further test the values we receive by comparing the values for a significant sample of
securities to another third-party valuation service on a quarterly basis.
Total securities amounted to $461.8 million, $329.0 million, and $320.2 million at December 31, 2017, 2016, and
2015, respectively. The increase in securities in 2017 was partially due to $49.4 million in securities acquired in the
acquisition of Carolina Bank in March 2017. Also, we sold $95.0 million in securities that we acquired from Asheville
Savings Bank in October 2017 and then subsequently purchased $150 million in mortgage-backed securities in the
fourth quarter of 2017. The increase in securities in 2016 was primarily due to purchases 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, 2017, of the $13.9 million (carrying value) in government-sponsored enterprise securities,
$6.4 million were issued by the Federal Home Loan Bank system, $5.0 million were issued by Fannie Mae, and the
remaining $2.5 million were issued by Freddie Mac.
Nearly all of our $359.0 million in total mortgage-backed securities have been issued by Freddie Mac, Fannie Mae,
Ginnie Mae, or the Small Business Administration, each of which are government-sponsored corporations. Included
in the mortgage-backed securities at December 31, 2017, were commercial mortgage-backed securities of $48.6
million that were issued by Ginnie Mae. We have one insignificant “private label” mortgage-backed security that was
purchased for Community Reinvestment Act purposes. Mortgage-backed securities vary in their repayment in
correlation with the underlying pools of mortgage loans.
At December 31, 2017, our $34.2 million investment in corporate bonds was comprised of the following:
($ in thousands)
Issuer
Bank of America
Citigroup
Goldman Sachs
JP Morgan Chase
Financial Institutions, Inc.
Wells Fargo
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+
BBB+
A-
BBB-
A-
BBB
Not Rated
(1)
(1)
(1)
(1)
(2)
(1)
(2)
Maturity Date
1/11/2023
Various
1/22/2023
1/25/2023
4/15/2030
2/13/2023
9/1/2024
6/15/2034
Amortized Cost
$ 7,000
6,035
5,090
5,022
4,000
3,096
2,549
1,000
$ 33,792
Fair Value
7,153
6,096
5,132
5,075
4,175
3,124
2,500
935
34,190
We have concluded that any unrealized losses associated with our corporate bonds are due to interest rate
considerations and not due to credit concerns.
54
We held $118.5 million in securities held to maturity at December 31, 2017, which had a fair value that exceeded
their carrying value by $0.5 million. Approximately $63.8 million of the securities held to maturity are mortgage-
backed securities that have been issued by either Freddie Mac or Fannie Mae. The remaining $54.7 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 $6.5 million. Management evaluated any unrealized losses on individual securities at each year
end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by
concerns about the ability of the issuers to meet their obligations.
At December 31, 2017, 2016, and 2015, net unrealized losses of $2.2 million, $3.1 million and $1.2 million,
respectively, were included in the carrying value of securities classified as available for sale. Management evaluated
any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and
caused by fluctuations in market interest rates and the overall economic environment, not by concerns about the
ability of the issuers to meet their obligations. Net unrealized losses (net of applicable deferred income taxes of $0.5
million, $1.1 million, and $0.5 million) have been reported as part of a separate component of shareholders’ equity
(accumulated other comprehensive income) as of December 31, 2017, 2016, and 2015, respectively.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 2.63% at December
31, 2017. The expected weighted average life of the available for sale portfolio using the call date for above-market
callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected life for mortgage-
backed securities, was 4.9 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 2.98% at December
31, 2017. The expected weighted average life of the held to maturity portfolio using the call date for above-market
callable bonds, the expected life for mortgage-backed securities, and the maturity date for all other securities, was
2.8 years.
The following table provides the names of issuers for which the Company has investment securities totaling in excess
of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of December 31, 2017.
All of these securities are issued by government sponsored corporations.
($ in thousands)
Issuer
Fannie Mae
Freddie Mac
Total
Loans
Amortized Cost
$ 154,606
107,712
$ 262,318
Fair Value
153,561
106,722
260,283
% of
Shareholders’
Equity
22.3%
15.5%
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. Substantially all of our entire current loan
portfolio is within our 40 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 failed banks in 2009 and 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 these loans became
significantly different from assets not covered under the loss share agreements, and accordingly, they were presented
55
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. Certain disclosures will continue to present the historical breakout of the loan portfolio between covered
and non-covered.
In 2017, loans outstanding increased $1.33 billion, or 49.1% to $4.0 billion. The growth in 2017 can be attributed to
the acquisitions of Carolina Bank and Asheville Savings Bank, as well as organic loan growth of $228.0 million. 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.
The majority of our loan portfolio over the years has been real estate mortgage loans, with loans secured by real
estate consistently comprising 88% 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, 2013 to 24% of total loans at December 31, 2017. This decline was due to a
combination of factors including consumers refinancing their home loans held by the Bank with long term fixed rate
loans, which we typically sell in the secondary market. Additionally, the Carolina Bank loan portfolio assumed during
the year had only an 11% mix of residential real estate loans.
Commercial real estate loans as a percentage of total loans has increased steadily over the past five years and
amounted to 42% of all loans at December 31, 2017. 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 15% of our accruing loans outstanding at December 31, 2017
mature within one year and 56% of total loans mature within five years. As of December 31, 2017, the percentages of
variable rate loans and fixed rate loans as compared to total performing loans were 38% and 62%, 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, 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
56
financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted
terms.
Table 12 summarizes our nonperforming assets at the dates indicated. 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 $53.4 million at December 31, 2017. At December 31, 2017, the ratio of
nonperforming assets to total assets was 0.96% compared to 1.64% and 2.66% at December 31, 2016 and 2015,
respectively.
Table 12a presents our nonperforming assets at December 31, 2017 by general geographic region.
The following is the composition, by loan type, of all of our nonaccrual loans at each period end:
($ 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
At December 31,
2017
$ 1,001
1,822
12,201
2,524
3,345
75
$ 20,968
At December 31,
2016
1,842
2,945
16,017
2,355
4,208
101
27,468
The nonaccrual table above generally indicates that we experienced decreases in almost all categories of nonaccrual
loans, with the “real estate – mortgage – residential (1-4 family) first mortgages” category experiencing the largest
decline. The decline in nonaccrual loans is due to our on-going focus to resolve our nonperforming loans and
improving credit quality.
Management routinely monitors the status of certain large loans that, in management’s opinion, have credit
weaknesses that could cause them to become nonperforming loans. In addition to the nonperforming loan amounts
discussed above, management believes that an estimated $2.5 million of loans that were performing in accordance
with their contractual terms at December 31, 2017 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, 2017 (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.
57
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, 2016 to December 31, 2017 our
asset quality improved, with total classified and nonaccrual loans decreasing from $98.5 million at December 31, 2016
to $79.4 million at December 31, 2017. This is consistent with our generally improving asset quality trends.
Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $12.6
million, $9.5 million, and $10.0 million at December 31, 2017, 2016, and 2015, 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. In 2017, we acquired $3.1 million and $3.9 million of
foreclosed real estate in the acquisitions of Carolina Bank and Asheville Savings Bank, respectively.
The following table presents the detail of our foreclosed real estate at each of the past two year ends:
$ in thousands
Vacant land
1-4 family residential properties
Commercial real estate
Total foreclosed real estate
At December 31, 2017
At December 31, 2016
$ 6,032
4,229
2,310
$ 12,571
3,221
4,345
1,966
9,532
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses” for the
period in which the charge is taken). Losses on loans are charged against the allowance in the period in which such
loans, in management’s opinion, become uncollectible. The recoveries realized during the period are credited to this
allowance. We consider our procedures for recording the amount of the allowance for loan losses and the related
provision for loan losses to be a critical accounting policy. See the heading “Critical Accounting Policies” above for
further discussion.
The factors that influence management’s judgment in determining the amount charged to operating expense include
recent loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and current
economic conditions.
We use a loan analysis and grading program to facilitate our evaluation of probable inherent loan losses and the
adequacy of our allowance for loan losses. In this program, credit risk grades are assigned by management and tested
by an independent third-party consulting firm. The testing program includes an evaluation of a sample of new loans,
loans we identify as having potential credit weaknesses, loans past due 90 days or more, loans originated by new loan
officers, nonaccrual loans and any other loans identified during previous regulatory and other examinations.
We strive to maintain our loan portfolio in accordance with what management believes are conservative loan
underwriting policies that result in loans specifically tailored to the needs of our market areas. Every effort is made to
identify and minimize the credit risks associated with such lending strategies. We have no foreign loans, few
agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans
are diversified among a variety of industries. The majority of loans captioned in the tables discussed below as “real
estate” loans are personal and commercial loans where real estate provides additional security for the loan.
Collateral for virtually all of these loans is located within our principal market area.
The total allowance for loan losses amounted to $23.3 million at December 31, 2017 compared to $23.8 million at
December 31, 2016 and $28.6 million at December 31, 2015.
Our allowance for loan loss is a mathematical model with the primary factors impacting this model being loan growth,
net charge-off history, and asset quality trends. Our allowance for loan loss model utilizes the net charge-offs
58
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 non-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. The improved loan quality trends were also 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. These same factors continued in 2016 and 2017 and were further impacted by net charge-offs that declined
significantly, amounting to only $3.7 million in 2016 and $1.2 million in 2017 compared to over $10 million in the
immediately preceding years.
The ratio of our allowance to total loans was 0.58%, 0.88%, and 1.13% at December 31, 2017, 2016, and 2015,
respectively. The decline in this ratio from December 31, 2015 to December 31, 2016 was a result of the factors
discussed above that impacted our relatively low levels of provision for loan losses. The decline in 2017 was primarily
due to the acquisitions of Carolina Bank and Asheville Savings Bank, which had over $1 billion in total loans.
Applicable accounting guidance did not allow us to record an allowance for loan losses upon the acquisition of loans –
instead the acquired loans were recorded at their discounted fair value, which included the consideration of any
expected losses. No allowance for loan losses will be recorded for the acquired loans until the expected credit losses
exceed the remaining unamortized discounts – based on an individual basis for purchased credit impaired loans and
on a pooled basis for performing acquired loans. See Critical Accounting Policies above for further discussion.
Unaccreted discount, which is available to absorb loan losses, amounted to $26.9 million, $12.7 million, and $15.3
million at December 31, 2017, December 31, 2016, and December 31, 2015, respectively. The ratios of allowance for
loan losses plus unaccreted discount were 1.24%, 1.35%, and 1.74% at December 31, 2017, December 31, 2016, and
December 31, 2015, respectively.
Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated. The amount of the
unallocated portion of the allowance for loan losses increased in 2017 due to a higher level of allowance resulting
from management qualitative analysis. 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 $1.2 million in 2017, $3.7 million in 2016, and $11.3 million in 2015.
Net loan charge-offs of non-covered loans amounted to $1.2 million in 2017, $5.4 million in 2016, and $13.6 million in
2015. 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), and ($2.3 million) in net charge-offs (recoveries) of covered loans during 2016 and 2015,
respectively.
59
Deposits
At December 31, 2017, deposits outstanding amounted to $4.41 billion, an increase of $1.46 billion from the $2.95
billion at December 31, 2016. During 2017, we acquired Carolina Bank with $585.4 million in deposits and Asheville
Savings Bank with $679.1 million in deposits. We also experienced organic growth totaling $195.1 million in 2017,
with the majority of our growth occurring in noninterest-bearing checking accounts. Our higher cost retail time
deposits declined by $50.4 million in 2017. Total brokered deposits amounted to $239.7 million at December 31,
2017, which is a 75.6% increase from the $136.5 million outstanding a year earlier. The increased usage of brokered
deposits was necessary because of organic loan growth that exceeded 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, 2016, deposits outstanding amounted to $2.95 billion, an increase of $136 million from the $2.81
billion at December 31, 2015. Similar to 2017, during 2016 we experienced strong growth in our noninterest-bearing
and interest-bearing checking accounts, and declines in our higher cost time deposits.
The nature of our deposit growth is illustrated in the table on page 52. 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
2017
27%
20%
22%
10%
6%
8%
7%
100%
2016
26%
21%
23%
7%
5%
10%
8%
100%
2015
23%
22%
23%
7%
3%
12%
10%
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 and the availability of
brokered deposits and borrowings, we chose 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, 2017, 2016, and 2015.
As of December 31, 2017, we held approximately $593.1 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, 2017. This table shows that 70% 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.
60
Borrowings
Our borrowings outstanding totaled $407.5 million at December 31, 2017, $271.4 million at December 31, 2016, and
$186.4 million at December 31, 2015. In 2017, 2016 and 2015, we obtained net new borrowings of $87 million, $85
million and $70 million, respectively, from a low cost funding source to help support our loan growth experienced
during the years. Also, during 2017, we acquired Carolina Bank and Asheville Savings Bank. Carolina Bank had $11.5
million in low-cost borrowings, with a fair value of $11.3 million at acquisition date, and $10.3 million in trust
preferred security debt, with a fair value of $7.2 million at acquisition date. Asheville Savings Bank had $20.0 million
in low-cost borrowings, with a fair value of $20.0 million at acquisition date.
Table 2 shows that average borrowings were $325.9 million in 2017, $209.7 million in 2016, and $149.8 million in
2015.
At December 31, 2017, the Company had three sources of readily available borrowing capacity – 1) an approximately
$936 million line of credit with the FHLB, of which $354 million and $225 million was outstanding at December 31,
2017 and 2016, respectively, 2) a $35 million federal funds line of credit with a correspondent bank, of which none
was outstanding at December 31, 2017 or 2016, and 3) an approximately $109 million line of credit through the
Federal Reserve Bank of Richmond’s (“FRB”) discount window, of which none was outstanding at December 31, 2017
or 2016.
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, 2017, the average amount of FHLB borrowings outstanding was
approximately $273.8 million with a weighted average interest rate for the year of 1.19%. The maximum amount of
short-term FHLB borrowings outstanding at any month-end during 2017 was $354 million. 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.
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 $198 million and $193 million at December 31, 2017 and 2016,
respectively, as a result of our pledging letters of credit backed by the FHLB for public deposits at each of those dates.
Our correspondent bank relationship allows us to purchase up to $35 million in federal funds on an overnight,
unsecured basis (federal funds purchased). We had no borrowings under this line at December 31, 2017 or 2016.
There were no federal funds purchased outstanding at any month-end during 2017 or 2016.
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, 2017, the available line of credit was approximately $109 million. At December 31, 2017 and 2016, we
had no borrowings outstanding under this line.
In addition to the lines of credit described above, we also had a total of $56.7 million in trust preferred security debt
outstanding at December 31, 2017 and 2016. 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.
61
In 2017, we assumed $10.3 million in trust preferred security debt in our acquisition of Carolina Bank. This borrowing
has a 30 year final maturity and was structured in a manner that allows them to qualify for regulatory capital
adequacy requirements. These debt securities are currently callable by the Company at par on any quarterly interest
payment date. The interest rate on these debt securities adjusts on a quarterly basis of three-month LIBOR plus
2.00%.
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, 2017, we had the ability to
obtain borrowings from the following three sources – 1) an approximately $936 million line of credit with the FHLB, 2)
a $35 million federal funds line with a correspondent bank, and 3) an approximately $109 million line of credit
through the FRB’s discount window.
Our overall liquidity increased in 2017 compared to 2016. Our liquid assets (cash and securities) as a percentage of
our total deposits and borrowings amounted to 19.8% at December 31, 2016 to 20.0% at December 31, 2017.
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,
2017. Any of our $354 million in outstanding borrowings with the FHLB may be accelerated immediately by the FHLB
in certain circumstances, including material adverse changes in our condition or if our qualifying collateral is less than
the amount required under the terms of the borrowing agreement.
In the normal course of business there are various outstanding commitments and contingent liabilities such as
commitments to extend credit, which are not reflected in the financial statements. The following table presents a
summary of our outstanding loan commitments as of December 31, 2017:
($ 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
$ 225
144
$ 369
Variable Rate
456
513
969
Total
681
657
1,338
At December 31, 2017 and 2016, we also had $15.2 million and $12.7 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
62
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, 2017 amounted to $693.0 million compared to $368.1 million at December 31,
2016 and $342.2 million at December 31, 2015. The two basic components that typically have the largest impact on
our shareholders’ equity are net income, which increases shareholders’ equity, and dividends declared, which
decrease shareholders’ equity. Additionally, any stock issuances (redemptions) can significantly increase (decrease)
shareholders’ equity.
In 2017, the most significant factors that impacted our equity were 1) the issuances of $284.2 million of common
stock in connection with two bank acquisitions, which increased equity, 2) the $46.0 million net income reported for
2017, which increased equity, and 3) common stock dividends declared of $8.3 million, which reduced equity. With
the acquisition of Carolina Bank in March 2017, we assumed a deferred compensation plan for certain members of
Carolina Bank’s board of directors that is fully funded by underlying Company stock, which was valued at $7.7 million
on the date of acquisition. Subsequent to the acquisition in 2017, approximately $4.1 million of the deferred
compensation was paid to the plan participants. See the Consolidated Statements of Shareholders’ Equity within the
consolidated financial statements for disclosure of other less significant items affecting 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.
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, 2017 and 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, and 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.
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 purchased several bank
branches over the years that resulted in our recording intangible assets, which negatively impacted regulatory capital
63
ratios. As discussed in “Borrowings” above, we currently have $56.7 million in trust preferred securities outstanding,
all of which qualify as Tier I capital under both current and forthcoming regulatory standards.
We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be
implemented, would have a material effect on our liquidity, capital resources, or operations.
The Company and the Bank must comply with regulatory capital requirements established by the Federal Reserve.
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.
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 were 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 include a “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%;
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%
64
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, 2017, 2016, and 2015 – 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, 2017, 2016, and 2015. 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, 2017, our total risk-based capital ratio was 12.50%
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 8.23% at December 31, 2017 compared to 8.16% at December 31, 2016.
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, 2017 and have no current plans to do so.
Return on Assets and Equity
Table 20 shows return on average assets (net income available to common shareholders divided by average total
assets), return on average common equity (net income available to common shareholders divided by average
common shareholders’ equity), dividend payout ratio (dividends per share divided by net income per common share)
and shareholders’ equity to assets ratio (average total shareholders’ equity divided by average total assets) for each
of the years in the three-year period ended December 31, 2017.
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. In 2017, the Federal Reserve steadily increased the prime rate three additional times, up to
4.50% (the rate at December 31, 2017). The consistency of the net interest margin is aided by the relatively low level
65
of long-term interest rate exposure that we maintain. At December 31, 2017, approximately 78% 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, 2017, 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, 2017, we had $1.3 billion more in interest-bearing
liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate
that net interest income would experience downward pressure in a rising interest rate environment and would
benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only
measures the magnitude of the timing differences and does not address earnings, market value, or management
actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects
of “when” various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates
among all products. For example, included in interest-bearing liabilities subject to interest rate changes within one
year at December 31, 2017 are deposits totaling $2.3 billion comprised of checking, savings, and certain types of
money market deposits with interest rates set by management. These types of deposits historically have not repriced
with, or in the same proportion, as general market indicators.
Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant
downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net
interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are
subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that
are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In
the short-term (less than six months), this results in us being asset-sensitive, meaning that our net interest income
benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates. However, in the
twelve-month horizon, the impact of having a higher level of interest-sensitive liabilities lessens the short-term
effects of changes in interest rates.
The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment in
which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less
applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-term interest
rates are substantially the same as long-term interest rates. As a result of the prolonged negative/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 challenges to increasing
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 our average funding rate approached zero several years ago, meaningful
further declines were not possible. Thus far, the five interest rate increases initiated by the Federal Reserve over the
66
past two years have not resulted in significant competitive pressure to increase deposit rates, but we expect the
competitive pressures to increase.
As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain
purchase accounting adjustments related to the acquired banks. The purchase accounting adjustments related to the
premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus
systematic and predictable. The accretion of the loan discount on acquired loans, which amounted to $7.1 million,
$4.5 million, and $4.8 million in 2017, 2016, and 2015, respectively, is less predictable and could be materially
different among periods. This is because of the magnitude of the discounts that are initially recorded and the fact
that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any
accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the
remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns
or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis.
In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff.
Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired loans
amounted to $26.9 million at December 31, 2017 compared to $12.7 million at December 31, 2016.
Based on our most recent interest rate modeling, which assumes two interest rate increases for 2018 (federal funds
rate = 2.00%, prime = 5.00%), we project that our net interest margin for 2018 will remain fairly stable. We expect
asset yields to increase, and we also expect that we will experience pressure to increase our deposit rates.
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.”
67
Table 1 Selected Consolidated Financial Data
($ in thousands, except per share and nonfinancial data)
Year Ended December 31,
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 before income taxes
Income taxes
Net income
Preferred stock dividends
Net income available to common shareholders
Earnings per common share – basic
Earnings 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)
2017
2016
2015
2014
2013
$ 177,382
12,671
164,711
723
163,988
48,908
145,157
67,739
21,767
45,972
−
45,972
1.82
1.82
130,987
7,607
123,380
(23)
123,403
25,551
106,821
42,133
14,624
27,509
(175)
27,334
1.37
1.33
126,655
6,908
119,747
(780)
120,527
18,764
98,131
41,160
14,126
27,034
(603)
26,431
1.34
1.30
139,832
8,223
131,609
10,195
121,414
14,368
97,251
38,531
13,535
24,996
(868)
24,128
1.22
1.19
147,511
10,985
136,526
30,616
105,910
23,489
96,619
32,780
12,081
20,699
(895)
19,804
1.01
0.98
$ 0.32
0.32
0.32
0.32
0.32
41.76
26.47
35.31
23.38
14.69
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
$ 5,547,037
4,042,369
−
4,042,369
23,298
257,507
4,406,955
407,543
692,979
$ 4,590,786
3,420,939
4,101,949
3,696,730
3,025,401
533,205
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
3,230,302
2,434,602
2,936,624
2,687,381
2,218,246
376,287
3,218,383
2,268,580
127,594
2,396,174
40,626
67,893
2,695,906
116,394
387,699
3,219,915
2,434,331
2,907,098
2,723,758
2,294,330
383,055
3,185,070
2,252,885
210,309
2,463,194
48,505
68,669
2,751,019
46,394
371,922
3,208,458
2,419,679
2,805,112
2,779,032
2,380,747
362,770
1.00%
8.62%
4.08%
8.23%
91.73%
0.58%
0.58%
0.96%
0.96%
0.04%
104
1,140
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
(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.
68
Table 2 Average Balances and Net Interest Income Analysis
2017
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
Year Ended December 31,
2016
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2015
Avg.
Rate
Interest
Earned
or Paid
$ 3,420,939
302,892
56,065
4.79%
2.74%
7.61%
$ 163,738
8,310
4,267
$ 2,603,327
298,083
49,986
4.66%
2.36%
7.61%
$ 121,322
7,034
3,802
$ 2,434,602
296,181
52,449
4.84%
2.13%
6.60%
$ 117,872
6,296
3,463
322,053
1.14%
3,657
157,522
0.56%
883
153,392
0.43%
658
4,101,949
79,025
98,216
311,596
$ 4,590,786
4.39%
179,972
3,108,918
59,835
76,418
177,096
$ 3,422,267
4.28%
133,041
2,936,624
61,212
75,452
157,014
$ 3,230,302
4.37%
128,289
$ 722,286 0.07%
0.19%
0.19%
0.79%
0.30%
825,015
385,967
504,349
261,910
$ 477
1,569
715
4,005
778
$ 583,786
657,211
200,093
405,220
268,854
2,699,527
325,874
0.28%
1.57%
7,544
5,127
2,115,164
209,659
0.06%
0.18%
0.05%
0.65%
0.33%
0.24%
1.16%
$ 360
1,160
100
2,654
896
$ 568,329 0.06%
0.13%
0.05%
0.70%
0.39%
582,407
184,821
410,692
322,205
$ 335
765
92
2,856
1,271
5,170
2,437
2,068,454
149,792
0.26%
1.06%
5,319
1,589
3,025,401
0.42%
12,671
2,324,823
0.33%
7,607
2,218,246
0.31%
6,908
997,203
34,977
533,205
712,349
24,380
360,715
618,927
16,842
376,287
$ 4,590,786
$ 3,422,267
$ 3,230,302
$ 167,301
4.08%
3.97%
4.10%
$ 125,434
4.03%
3.95%
3.51%
$ 121,381
4.13%
4.06%
3.26%
($ 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 $536, ($457), and ($39) for 2017, 2016, and 2015, respectively.
Includes accretion of discount on covered loans of $7,076, $4,451, and $4,751 in 2017, 2016, and 2015, respectively.
Includes tax-equivalent adjustments of $2,590, $2,054, and $1,634 in 2017, 2016, and 2015, respectively, to reflect the federal and state tax benefit
of the tax-exempt securities (using a 37.6% combined tax rate), reduced by the related nondeductible portion of interest expense.
69
Table 3 Volume and Rate Variance Analysis
($ 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, 2017
Year Ended December 31, 2016
Change Attributable to
Change Attributable to
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$ 38,618
123
463
1,395
40,599
88
308
219
718
(22)
1,311
1,590
2,901
3,798
1,153
2
1,379
6,332
29
101
396
633
(96)
1,063
1,100
2,163
42,416
1,276
465
2,774
46,931
117
409
615
1,351
(118)
2,374
2,690
5,064
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
Net interest income (tax-equivalent)
$ 37,698
4,169
41,867
7,338
(3,285)
4,053
________________________________
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 sale
Other gains (losses), net
Total
2017
$ 11,862
14,610
5,695
5,300
4,024
5,479
2,321
49,291
(531)
−
−
(235)
−
383
$ 48,908
Year Ended December 31,
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
2015
11,648
10,906
2,532
2,580
−
−
1,665
29,331
(2,504)
1,018
(8,615)
(1)
−
(465)
18,764
70
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
Software license expense
Legal and audit
Non-credit losses
Other operating expenses
Total
Table 6 Income Taxes
($ in thousands)
Current - Federal
- State
Deferred - Federal
- State
Total tax expense
Effective tax rate
2017
$ 66,786
14,389
81,175
9,661
4,480
8,073
4,240
2,470
2,511
2,399
2,910
2,350
2,549
1,736
1,969
1,497
887
16,250
$ 145,157
Year Ended December 31,
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
1,934
1,604
1,408
1,164
12,464
106,821
2015
47,660
9,134
56,794
7,358
3,749
−
722
2,133
1,677
2,039
1,935
2,394
1,674
2,113
1,710
1,689
360
11,784
98,131
2017
$ 11,286
1,996
7,742
743
$ 21,767
2016
12,827
1,679
16
102
14,624
2015
9,149
1,436
3,205
336
14,126
32.1%
34.7%
34.3%
71
Table 7 Distribution of Assets and Liabilities
2017
As of December 31,
2016
2015
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 $100,000 or more
Other time deposits
Total deposits
Borrowings
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
73%
6
2
7
88
2
2
−
5
−
2
1
100%
22%
16
18
8
11
5
80
7
1
88
12
100%
74%
6
4
6
90
2
2
−
2
−
2
2
100%
21%
17
19
6
12
7
82
7
1
90
10
100%
74%
5
5
7
91
2
2
−
2
−
2
1
100%
20%
19
19
5
12
9
84
5
1
90
10
100%
Table 8 Securities Portfolio Composition
($ 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
2017
$ 13,867
295,213
34,190
−
343,270
63,829
54,674
118,503
As of December 31,
2016
17,490
148,065
33,600
174
199,329
80,585
49,128
129,713
2015
18,972
121,553
24,946
143
165,614
102,509
52,101
154,610
Total securities
$ 461,773
329,042
320,224
Average total securities during year
$ 358,957
348,069
348,630
72
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 one but within five years
Due after five but within ten years
Due after ten years
Total
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
Total
Securities held to maturity:
Mortgage-backed securities (2)
Due after one but within five years
Due after five but within ten years
Total
State and local governments
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total securities held to maturity
Total securities held to maturity
Due within one year
Due after one but within five years
Due after five but within ten years
Due after ten years
Total
As of December 31,
2017
Book
Value
Fair
Value
Book
Yield (1)
$ 14,000
14,000
5
99,169
183,080
15,436
297,690
1,007
27,785
5,000
33,792
5
114,176
210,865
20,436
$ 345,482
$ 57,485
6,344
63,829
2,257
23,285
23,502
5,630
54,674
2,257
80,770
29,846
5,630
$ 118,503
13,867
13,867
5
98,283
181,576
15,349
295,213
1,038
28,042
5,110
34,190
5
113,188
209,618
20,459
343,270
56,798
6,294
63,092
2,258
23,795
24,219
5,634
55,906
2,258
80,593
30,513
5,634
118,998
2.15%
2.15%
3.83%
2.23%
2.65%
2.89%
2.52%
3.88%
3.44%
5.57%
3.77%
3.83%
2.23%
2.75%
3.55%
2.63%
1.99%
2.50%
2.04%
3.30%
4.22%
4.36%
2.61%
4.08%
3.30%
2.63%
3.96%
2.61%
2.98%
___________________________________
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 36.7% tax rate.
(2) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.
73
Table 10 Loan Portfolio Composition
As of December 31,
2017
2016
2015
2014
2013
% of
Total
Loans
Amount
% of
Total
Loans
% of
Total
Loans
Amount
Amount
Amount
% of
Total
Loans
Amount
% of
Total
Loans
$ 381,130
10%
$ 261,813
9%
$ 202,671
8%
$ 160,878
7%
$ 168,469
7%
539,020
13%
354,667
13%
308,969
12%
288,148
12%
305,246
12%
972,772
24%
750,679
28%
768,559
31%
789,871
33%
838,862
34%
379,978
9%
239,105
9%
232,601
9%
223,500
9%
227,907
9%
1,696,107
42%
1,049,460
39%
957,587
38%
882,127
37%
855,249
35%
74,348
4,043,355
2%
100%
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%
(986)
$4,042,369
(49)
$2,710,712
873
$2,518,926
946
$2,396,174
928
$2,463,194
($ in thousands)
Commercial, financial, and
agricultural
Real estate – construction,
land development &
other land loans
Real estate – mortgage –
residential (1-4 family)
first mortgages
Real estate – mortgage –
home equity loans /
lines of credit
Real estate – mortgage –
commercial and other
Installment loans to
individuals
Loans, gross
Unamortized net deferred
loan costs (fees)
Total loans
74
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
loans to individuals
Total at variable rates
installment
Fixed Rate Loans:
Commercial, financial, and
agricultural
Real estate – construction only
Real estate – all other mortgage
Consumer, primarily
loans to individuals
Total at fixed rates
installment
Subtotal
Nonaccrual loans
Total loans
As of December 31, 2017
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
$ 73,986
93,609
117,003
5.16%
5.28%
5.22%
$ 40,711
70,328
193,909
4.87%
4.43%
4.88%
$ 24,838
38,939
468,781
4.55%
3.81%
4.25%
$ 139,535
202,876
779,693
4.97%
4.70%
4.55%
6,225
4.91%
67,842
4.84%
292,007
4.53%
366,074
4.59%
2,481
293,304
5.87%
5.22%
26,366
399,156
8.94%
5.06%
4,613
829,178
6.29%
4.35%
33,460
1,521,638
8.35%
4.70%
33,077
72,582
198,749
4,345
308,753
602,057
20,968
$ 623,025
5.91%
3.97%
5.03%
6.38%
4.89%
5.05%
114,038
45,575
1,058,772
30,909
1,249,294
1,648,450
─
$1,648,450
4.36%
4.53%
4.55%
4.70%
4.54%
4.67%
91,550
65,057
777,038
8,071
941,716
1,770,894
─
$1,770,894
3.02%
4.17%
4.21%
9.80%
4.14%
4.24%
238,665
183,214
2,034,559
43,325
2,499,763
4,021,401
20,968
$ 4,042,369
4.06%
4.18%
4.47%
5.82%
4.43%
4.53%
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
75
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
2017
2016
As of December 31,
2015
2014
2013
$ 20,968
19,834
27,468
22,138
39,994
28,011
50,066
35,493
40,802
−
12,571
$ 53,373
49,606
−
9,532
59,138
68,005
−
9,188
77,193
85,559
−
9,771
95,330
41,938
27,776
69,714
−
12,251
81,965
Purchased credit impaired loans not included above (2)
$ 23,165
−
−
−
−
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
$ −
−
−
−
$ −
−
−
−
−
−
7,816
3,478
10,508
5,823
11,294
806
12,100
16,331
2,350
18,681
37,217
8,909
46,126
24,497
70,623
Total nonperforming assets
$ 53,373
59,138
89,293
114,011
152,588
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 and
non-covered foreclosed real estate
Non-covered nonperforming assets to total non-covered
assets
1.01%
1.32%
0.96%
1.01%
1.32%
0.96%
1.83%
2.17%
1.64%
1.83%
2.17%
1.64%
3.15%
3.53%
2.66%
2.81%
3.18%
2.37%
4.25%
4.73%
3.54%
4.70%
6.10%
4.79%
3.77%
3.09%
4.18%
3.62%
3.09%
2.78%
(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.
In the March 3, 2017 acquisition of Carolina Bank. and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3
million and $9.9 million, respectively, in purchased credit impaired loans in accordance with ASC 310-30 accounting guidance. These loans are
excluded from the nonperforming loan amounts.
(2)
76
Table 12a Nonperforming Assets by Geographical Region
($ 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
Former Virginia Region
Other
Total nonaccrual loans and troubled
debt restructurings
Foreclosed Real Estate (1)
Eastern Region (NC)
Triangle Region (NC)
Triad Region (NC)
Charlotte Region (NC)
Southern Piedmont Region (NC)
Western Region (NC)
South Carolina Region
Former Virginia Region
Other
Total foreclosed real estate
As of December 31, 2017
Total Nonperforming
Loans
Total Loans
Nonperforming Loans to
Total Loans
$ 10,800
10,813
8,053
1,177
6,765
243
2,455
472
24
812,000
840,000
919,000
265,000
285,000
696,000
135,000
2,000
88,000
$ 40,802
4,042,000
1.3%
1.3%
0.9%
0.4%
2.4%
0.0%
1.8%
23.6%
0.0%
1.0%
$ 404
1,798
2,211
275
865
4,480
559
1,979
–
$ 12,571
_____________________________
(1) The counties comprising each region are as follows:
Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret
Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake
Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth, Alamance
Southern Piedmont North Carolina Region - Anson, Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland
Western North Carolina Region – Buncombe, Henderson, Madison, McDowell, Transylvania
South Carolina Region - Chesterfield, Dillon, Florence
Former Virginia Region - Wythe, Washington, Montgomery, Roanoke
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg
Other includes loans originated on a national basis through the Company’s SBA Lending Division
77
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
Allowance for loan losses related to covered loans
included above (1)
_____________________
2017
2016
As of December 31,
2015
2014
2013
$ 3,111
2,816
3,829
2,691
4,764
3,790
6,911
8,520
10,013
11,373
14,449
950
21,326
1,972
$ 23,298
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
$ ̶
̶
1,799
2,281
4,242
(1) During 2016, all FDIC loss share agreements were terminated, and accordingly, there were no covered loans at December 31, 2017 and 2016.
78
Table 14 Loan Loss and Recovery Experience
($ in thousands)
2017
2016
As of December 31,
2015
2014
2013
Loans outstanding at end of year
$ 4,042,369
2,710,712
2,518,926
2,396,174
2,463,194
Average amount of loans outstanding
$ 3,420,939
2,603,327
2,434,602
2,434,331
2,419,679
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:
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
(1)
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 net
charge-offs
Recoveries of loans previously charged-off as a
percent of loans charged-off
$ 23,781
723
−
723
24,504
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
(1,622)
(589)
(2,641)
(978)
(1,182)
(799)
(7,811)
1,311
2,579
1,076
(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)
(6,071)
(10,582)
(4,050)
(4,764)
(1,607)
(4,405)
(1,924)
(23,236)
149
3,363
646
(3,143)
(7,027)
(2,253)
(32,436)
198
777
595
333
1,027
279
6,605
(1,206)
−
$ 23,298
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
$ −
1,714
2,306
(3,332)
(12,867)
0.04%
0.58%
19.32x
0.14%
0.88%
6.38x
0.46%
1.13%
2.54x
0.74%
1.70%
2.25x
1.18%
1.97%
1.70x
59.95%
-0.62%
-6.93%
56.41%
107.38%
84.56%
64.19%
38.89%
22.22%
12.09%
(1) 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.
79
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
2017
Year Ended December 31,
2016
2015
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$ 722,286
825,015
385,967
504,349
261,910
2,699,527
997,203
$ 3,696,730
0.07%
0.19%
0.19%
0.79%
0.30%
0.28%
0.20%
$ 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%
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, 2017
Over 6 to 12
Months
Over 12
Months
Total
Time deposits of $100,000 or more
$ 130,326
106,675
180,891
175,231
593,123
80
Table 17 Interest Rate Sensitivity Analysis
Percent of total earning assets
Cumulative percent of total earning assets
35.09%
35.09%
($ 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, 2017
Total Within
12 Months
Over 3 to 12
Months
Over 12
Months
3 Months
or Less
$ 1,300,837
26,357
9,728
375,189
$ 1,712,111
$ 884,254
984,945
454,860
130,326
82,033
259,704
$ 2,796,122
280,500
34,242
13,781
─
328,523
6.73%
41.82%
─
─
─
287,566
139,017
100,000
526,583
1,581,337
60,599
23,509
375,189
2,040,634
41.82%
41.82%
884,254
984,945
454,860
417,892
221,050
359,704
3,322,705
2,461,032
282,671
94,994
─
2,838,697
58.18%
100.00%
─
─
─
175,231
72,562
47,839
295,632
Total
4,042,369
343,270
118,503
375,189
4,879,331
100.00%
100.00%
884,254
984,945
454,860
593,123
293,612
407,543
3,618,337
77.28%
14.55%
91.83%
8.17%
100.00%
77.28%
91.83%
91.83%
100.00%
100.00%
$ (1,084,011)
(1,084,011)
(198,060)
(1,282,071)
(1,282,071)
(1,282,071)
2,543,065
1,260,994
1,260,994
1,260,994
(22.22%)
(26.28%)
(26.28%)
25.84%
25.84%
61.23%
61.41%
61.41%
134.85%
134.85%
____________________________________
(1) The three months or less category for loans includes $249,372 in adjustable rate loans that have reached their contractual rate floors. Thus, the
interest rates on these loans will not decrease any further. For the majority of these loans, it will take an increase in prime rate of at least 100 basis
points before the loans will reprice higher.
(2) Securities available for sale include government-sponsored enterprise securities, mortgage-backed securities, and corporate bonds. Securities held to
maturity include mortgage-backed securities and state and local government securities. For fixed rate mortgage-backed securities, the principal is
assumed to reprice equally over the average life of the underlying security. All other fixed rate securities are assumed to reprice based on maturity
date or call date. Variable rate securities are included in the period in which they are subject to reprice.
81
Table 18 Contractual Obligations and Other Commercial Commitments
Contractual
Obligations
As of December 31, 2017
Borrowings
Operating leases
Total contractual cash obligations,
excluding deposits
Deposits
Total contractual cash obligations,
including deposits
Payments Due by Period ($ in thousands)
Total
$ 407,543
10,530
On Demand or
Less
than 1 Year
303,000
1,692
1-3 Years
40,000
2,706
4-5 Years
−
1,742
After 5 Years
64,543
4,390
418,073
304,692
42,706
1,742
68,933
4,406,955
4,159,162
192,088
51,399
4,306
$ 4,825,028
4,463,854
234,794
53,141
73,239
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial
Commitments
As of December 31, 2017
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
Total
Amounts
Committed
$ 103,431
1,234,841
15,226
$ 1,353,498
Less
than 1 Year
51,716
445,790
14,221
511,727
1-3 Years
4-5 Years
After 5 Years
51,715
190,623
1,005
243,343
─
218,844
─
218,844
─
379,584
─
379,584
82
Table 19 Market Risk Sensitive Instruments
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2017 Occurring in Indicated Year
($ in thousands)
2018
2019
2020
2021
2022
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
$ 375,189
12,459
375,189
1.50%
$ 375,189
12,459
4.10%
12,459
72,503
308,753
293,304
$ 1,062,208
88,911
212,288
105,067
406,266
85,554
257,424
97,039
440,017
71,331
342,173
106,480
519,984
56,633
437,410
90,570
584,613
89,053
941,715
829,178
1,859,946
463,985
2,499,763
1,521,638
4,873,034
2.73%
4.43%
4.70%
4.13%
462,268
2,502,689
1,510,192
$ 4,862,797
$ 884,254
984,945
454,860
638,942
303,000
−
$ 3,266,001
146,363
–
146,363
45,725
40,000
–
85,725
27,710
–
27,710
23,689
–
23,689
4,306
10,785
53,758
68,849
884,254
984,945
454,860
886,735
353,785
53,758
3,618,337
0.06%
0.21%
0.20%
0.78%
1.43%
3.45%
0.48%
$ 884,254
984,945
454,860
881,537
352,995
44,908
$ 3,603,499
______________________
(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, 2017 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
2017
For the Year Ended December 31,
2016
2015
Return on average assets
Return on average common equity
Dividend payout ratio – common shares
Average shareholders’ equity to average assets
1.00%
8.62%
17.58%
11.61%
0.80%
7.73%
23.36%
10.54%
0.82%
8.04%
23.88%
11.65%
83
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
2017
As of December 31,
2016
2015
$ 692,979
̶
(240,299)
368,101
̶
(64,496)
342,190
(7,287)
(55,687)
4,146
456,826
̶
52,054
(89)
508,791
5,107
308,712
̶
45,000
(349)
353,363
3,550
282,766
7,287
45,000
̶
335,053
23,298
818
24,116
$ 532,907
23,781
703
24,484
377,847
28,583
489
29,072
364,125
Total risk weighted assets
$ 4,262,941
2,828,118
2,519,193
Adjusted fourth quarter average assets
5,554,545
3,539,363
3,227,166
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
10.72%
5.75%
7.00%
11.94%
7.25%
8.50%
12.50%
9.25%
10.50%
9.58%
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%
11.22%
4.50%
7.00%
13.30%
6.00%
8.50%
14.45%
8.00%
10.50%
10.38%
4.00%
4.00%
84
Table 22 Quarterly Financial Summary (Unaudited)
($ 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
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
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
2017
2016
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$ 53,686
4,216
49,470
610
48,860
̶
48,860
14,862
43,617
20,105
5,928
14,177
̶
45,713
3,372
42,341
702
41,639
̶
41,639
12,362
34,384
19,617
6,531
13,086
̶
43,520
2,911
40,609
693
39,916
̶
39,916
11,875
35,084
16,707
5,553
11,154
̶
37,053
2,172
34,881
585
34,296
723
33,573
9,809
32,072
11,310
3,755
7,555
̶
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
30,654
459
30,195
258
29,937
5,002
24,773
10,166
3,329
6,837
(58)
14,177
13,086
11,154
7,555
8,355
4,620
7,580
6,779
$ 0.48
0.48
0.08
41.76
34.08
35.31
23.38
14.69
0.53
0.53
0.08
34.85
29.73
34.41
20.73
14.25
0.45
0.45
0.08
32.27
27.50
31.26
20.29
14.16
0.34
0.34
0.08
0.41
0.40
0.08
31.31
26.47
29.29
19.85
13.53
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
19.59
17.83
18.85
17.24
13.75
$ 5,554,545
4,048,224
4,899,421
4,390,879
3,618,312
699,558
4,514,409
3,404,862
4,040,257
3,632,319
2,958,134
520,432
4,448,404
3,327,391
3,989,593
3,610,944
2,944,208
496,791
3,856,589
2,903,279
3,478,525
3,152,778
2,580,950
426,842
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
1.01%
8.04%
12.49%
1.15%
9.98%
11.16%
1.01%
9.01%
11.06%
0.79%
7.18%
11.02%
0.94%
9.17%
10.18%
0.53%
5.13%
10.32%
0.90%
8.68%
10.43%
0.82%
7.97%
10.34%
of period
8.23%
7.95%
7.98%
7.79%
8.16%
8.24%
8.39%
8.46%
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
8.23%
92.20%
7.95%
93.74%
7.98%
92.15%
7.79%
92.09%
8.16%
92.36%
8.03%
93.36%
8.18%
91.44%
8.24%
91.10%
135.41%
4.01%
0.58%
136.58%
4.16%
0.72%
135.51%
4.08%
0.71%
134.78%
4.07%
0.72%
135.04%
3.94%
0.88%
134.85%
3.93%
0.93%
133.48%
4.21%
1.00%
131.49%
4.07%
1.05%
loans
1.01%
1.27%
1.30%
1.44%
1.83%
2.27%
2.59%
2.83%
Nonperforming assets as a percent of
total assets
Net charge-offs (recoveries) as a percent
0.96%
1.16%
1.21%
1.35%
1.64%
1.98%
2.25%
2.43%
of average total loans
0.13%
-0.07%
-0.06%
0.13%
0.12%
0.06%
0.05%
0.35%
85
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2017 and 2016
($ in thousands)
Assets
Cash and due from banks, noninterest-bearing
Due from banks, interest-bearing
Total cash and cash equivalents
Securities available for sale
Securities held to maturity (fair values of $118,998 in 2017 and $130,195 in 2016)
Presold mortgages in process of settlement
Loans
Allowance for loan losses
Net loans
Premises and equipment
Accrued interest receivable
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)
Shareholders’ Equity
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Series C, convertible, issued & outstanding: none in 2017 and 2016
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 29,639,374 shares in 2017 and 20,844,505 shares in 2016
Retained earnings
Stock in rabbi trust assumed in acquisition
Rabbi trust obligation
Accumulated other comprehensive income (loss)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
86
2017
2016
$ 114,301
375,189
489,490
71,645
234,348
305,993
343,270
118,503
12,459
4,042,369
(23,298)
4,019,071
116,233
14,094
233,070
24,437
12,571
99,162
64,677
$ 5,547,037
$ 1,196,161
884,254
984,945
454,860
593,123
293,612
4,406,955
407,543
1,235
38,325
4,854,058
199,329
129,713
2,116
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
−
−
432,794
264,331
(3,581)
3,581
(4,146)
692,979
$ 5,547,037
147,287
225,921
−
−
(5,107)
368,101
3,614,862
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2017, 2016 and 2015
($ 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
Gain on branch sale
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.
87
2017
2016
2015
$ 163,738
121,322
117,872
8,310
1,677
3,657
177,382
2,761
4,005
778
5,127
12,671
164,711
723
−
723
163,988
11,862
14,610
5,695
5,300
4,024
5,479
2,321
(531)
−
(235)
−
383
48,908
66,786
14,389
81,175
9,661
4,480
8,073
4,240
37,528
145,157
67,739
21,767
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
1,466
(29)
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
45,972
27,509
27,034
−
(175)
(603)
$ 45,972
27,334
26,431
$ 1.82
1.82
1.37
1.33
1.34
1.30
$ 0.32
0.32
0.32
25,210,606
25,291,382
19,964,727
20,732,917
19,767,470
20,499,727
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2017, 2016 and 2015
($ in thousands)
2017
2016
2015
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)
$ 45,972
27,509
27,034
639
(234)
235
(87)
1,601
(593)
211
(75)
1,697
(1,919)
683
(3)
1
(557)
115
202
(79)
(1,557)
(473)
184
1
−
(4,321)
1,685
(79)
31
(2,972)
Comprehensive income
$ 47,669
25,952
24,062
See accompanying notes to consolidated financial statements.
88
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2017, 2016 and 2015
($ in thousands, except per share)
Common Stock
Preferred
Stock
Shares
Amount
Retained
Earnings
Stock in
rabbi
trust
assumed
in
acquisi-
tion
Rabbi trust
obligation
Accumu-
lated
Other
Compre-
hensive
Income
(Loss)
Total
Share-
holders’
Equity
Balances, January 1, 2015
$ 70,787
19,710
$ 132,532
184,958
̶
̶
(578)
387,699
Net income
Cash dividends declared ($0.32 per
common share)
Preferred stock redeemed (Series B)
Preferred stock dividends
Stock option exercises
Stock withheld for payment of taxes
Stock-based compensation
Other comprehensive income (loss)
27,034
(6,329)
(603)
(63,500)
7
(3)
34
112
(54)
803
27,034
(6,329)
(63,500)
(603)
112
(54)
803
(2,972)
(2,972)
Balances, December 31, 2015
7,287
19,748
133,393
205,060
̶
̶
(3,550)
342,190
Net income
Cash dividends declared ($0.32 per
common share)
Preferred stock dividends
Conversion of preferred stock to
common stock
(7,287)
Equity issued pursuant to acquisitions
Stock option exercises
Stock withheld for payment of taxes
Stock-based compensation
Other comprehensive income (loss)
729
279
23
(6)
72
7,287
5,509
375
(166)
889
27,509
(6,473)
(175)
27,509
(6,473)
(175)
-
5,509
375
(166)
889
(1,557)
(1,557)
Balances, December 31, 2016
−
20,845
147,287
225,921
̶
̶
(5,107)
368,101
Net income
Cash dividends declared ($0.32 per
common share)
Equity issued pursuant to acquisitions
Payment of deferred fees
Stock option exercises
Stock withheld for payment of taxes
Stock-based compensation
Reclassification of accumulated other
comprehensive income due to
statutory tax changes
Other comprehensive income (loss)
8,733
284,192
18
(7)
50
287
(231)
1,259
45,972
(8,298)
736
(7,688)
4,107
7,688
(4,107)
45,972
(8,298)
284,192
−
287
(231)
1,259
(736)
1,697
−
1,697
Balances, December 31, 2017
$ ̶
29,639
$ 432,794
264,331
(3,581)
3,581
(4,146)
692,979
See accompanying notes to consolidated financial statements.
89
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2017, 2016 and 2015
($ 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
Purchase accounting accretion and amortization, net
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 sale of presold mortgage and SBA loans
Originations of presold mortgage loans in process of settlement
Proceeds from sales of presold mortgage loans in process of settlement
Origination of SBA loans for sale
Proceeds from sales of SBA loans
Gain on sale of branches
Increase in accrued interest receivable
Decrease (increase) in other assets
Increase (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 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 received (paid) in acquisitions
Net cash used by investing activities
Cash Flows From Financing Activities
Net increase 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: Foreclosed loans transferred to foreclosed real estate
Non-cash: Unrealized gain (loss) on securities available for sale, net of taxes
See accompanying notes to consolidated financial statements.
90
2017
2016
2015
$ 45,972
27,509
27,034
723
2,908
(7,076)
(236)
−
531
235
(383)
975
5,493
1,095
4,240
(11,174)
(228,871)
235,493
(95,436)
77,034
−
(1,072)
6,724
392
(10,729)
26,838
(191,260)
(291)
37,974
22,344
140,621
(9,947)
−
(204,631)
−
−
8,647
(4,659)
151
−
72,519
(128,532)
195,468
97,263
(7,596)
−
−
287
(231)
285,191
(23)
3,341
(4,451)
−
10,255
625
(3)
29
922
4,602
714
1,211
(3,466)
(76,912)
81,127
(24,784)
20,021
(1,466)
(120)
(724)
(4)
2,868
41,271
(114,396)
−
76,939
23,368
8
(3,933)
−
(192,393)
(1,554)
(2,012)
7,954
(8,689)
2,025
26,211
(53,640)
(240,112)
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
183,497
305,993
$ 489,490
38,725
267,268
305,993
14,184
253,084
267,268
$ 12,239
19,537
5,452
553
7,653
11,791
8,117
(1,238)
7,009
13,815
9,009
(288)
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
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 acquired loans.
(b) Reclassifications Certain amounts for prior years have been reclassified to conform to the 2017 presentation.
The reclassifications had no effect on net income or shareholders’ equity as previously presented, nor did they
materially impact trends in financial information.
(c) Business Combinations – The Company accounts for business combinations using the acquisition method of
accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase
price over the fair value of the net assets acquired is capitalized as goodwill. Under this method, all identifiable assets
acquired, including purchased loans, and liabilities assumed are recorded at fair value.
The Company typically issues common stock and/or pays cash for an acquisition, depending on the terms of the
acquisition agreement. The value of common shares issued is determined based on the market price of the stock as of
the closing of the acquisition.
(d) 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.”
(e) 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.
91
A decline in the market value of any available for sale or held to maturity security below cost that is deemed to be
other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established. Any equity security that is in an unrealized loss position for
twelve consecutive months is presumed to be other than temporarily impaired and an impairment charge is recorded
unless the amount of the charge is insignificant.
Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification
method. Premiums and discounts are amortized into income on a level yield basis, with premiums being amortized to
the earliest call date and discounts being accreted to the stated maturity date.
(f) 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.
(g) 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 on the purchase date.
The Company follows specific accounting guidance related to purchased impaired loans. A loan is considered to be a
purchased credit impaired loan 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,
risk grade and nonaccrual status. At the acquisition date, when possible, a stream of expected cash flows is estimated
and compared to the estimated fair value in order to determine the accretable yield amount, which is then
recognized over the life of the loan based on the effective yield method. Throughout the life of the loan, the stream
of expected cash flows may change based on actual results of the loan or the assumptions related to the future
performance. Subsequent changes of expected cash flows may result in changes to accretable yield if the present
value of expected cash flows exceeds the carrying value or an impairment reserve if the present value of expected
cash flows is less than the carrying amount.
For purchased impaired loans for which the timing and amount of cash flows expected to be collected cannot be
reasonably estimated, the Company uses the cost recovery method of income recognition. 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.
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. An allowance for loan losses is
recorded for these loans when the estimated credit losses exceed the remaining unamortized discounts, based on
pools of similar loans.
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
92
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.
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 less estimated selling costs. 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.
(h) 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.
(i) 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 an insignificant amount of these loans held for sale at December 31, 2017
and 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.
93
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, 2017 or 2016.
(j) Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged-off against the allowance for loan losses when management believes that the
collectability of the principal is unlikely. Recoveries on loans previously charged-off are added back to the allowance.
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an
estimated balance considered adequate to absorb losses inherent in the portfolio. Management’s determination of
the adequacy of the allowance is based on several factors, including:
1. Risk grades assigned to the loans in the portfolio,
2. Specific reserves for individually evaluated impaired loans,
3. Current economic conditions, including the local, state, and national economic outlook; interest rate risk;
trends in loan volume, mix and size of loans; levels and trends of delinquencies,
4. Historical loan loss experience, and
5. An assessment of the risk characteristics of the Company’s loan portfolio, including industry
concentrations, payment structures, 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.
(k) 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.
(l) 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.
(m) 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(s), is subject to fair value
impairment tests on at least an annual basis.
(n) 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
94
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.”
(o) 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, 2017 and 2016, the Company’s investments in limited partnerships, LLCs and other privately held
companies totaled $5.3 million and $3.1 million, respectively, and were included in other assets.
(p) Stock Option Plan At December 31, 2017, 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.
(q) 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. In 2016 and 2015, the Company’s potentially dilutive
common stock issuances also included 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 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
95
beginning of the reporting period. Dividends on the preferred stock are added back to net income in 2016 and 2015
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)
2017
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2016
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2015
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
$ 45,972
25,210,606
$ 1.82
$ 27,334
19,964,727
$ 1.37
$ 26,431
19,767,470
$ 1.34
-
80,776
175
768,190
233
732,257
$ 45,972
25,291,382
$ 1.82
$ 27,509
20,732,917
$ 1.33
$ 26,664
20,499,727
$ 1.30
For the year ended December 31, 2017, there were no options that were anti-dilutive. For the years ended December
31, 2016 and 2015, there were 5,000 options and 50,000 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.
(r) Fair Value of Financial Instruments Relevant accounting guidance requires that the Company disclose estimated
fair values for its financial instruments. Fair value methods and assumptions are set forth below for the Company’s
financial instruments.
Cash and Amounts Due from Banks, Federal Funds Sold, Presold Mortgages in Process of Settlement, Accrued Interest
Receivable, and Accrued Interest Payable The carrying amounts approximate their fair value because of the short
maturity of these financial instruments.
Available for Sale and Held to Maturity Securities Fair values are provided by a third-party and are based on quoted
market prices, where available. If quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments or matrix pricing.
Loans For nonimpaired loans, fair values are estimated for portfolios of loans with similar financial characteristics.
Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate
mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable
interest rate terms. The fair value for each category is determined by discounting scheduled future cash flows using
current interest rates offered on loans with similar risk characteristics. Fair values for impaired loans are primarily
based on estimated proceeds expected upon liquidation of the collateral or the present value of expected cash flows.
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
96
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, 2017 and 2016, the Company’s off-
balance sheet financial instruments had no carrying value. The large majority of commitments to extend credit and
standby letters of credit are at variable rates and/or have relatively short terms to maturity. Therefore, the fair value
for these financial instruments is considered to be immaterial.
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly
liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net
premises and equipment, intangible assets and other assets such as foreclosed properties, deferred income taxes,
prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the
income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in any of the estimates.
(s) Impairment Goodwill is evaluated for impairment on at least an annual basis by comparing the estimated 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.
97
(t) 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
Additional pension asset (liability)
Deferred tax asset (liability)
Net additional pension asset (liability)
December 31,
2017
$ (2,211)
517
(1,694)
December 31,
2016
(3,085)
1,138
(1,947)
December 31,
2015
(1,163)
454
(709)
(3,200)
748
(2,452)
(5,012)
1,852
(3,160)
(4,657)
1,816
(2,841)
Total accumulated other comprehensive income (loss)
$ (4,146)
(5,107)
(3,550)
The following table discloses the changes in accumulated other comprehensive income (loss) for the year ended
December 31, 2017 (all amounts are net of tax).
($ in thousands)
Beginning balance at January 1, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income
Net current-period other comprehensive income (loss)
Unrealized Gain
(Loss) on
Securities
Available for Sale
$ (1,947)
405
148
553
Additional
Pension Asset
(Liability)
(3,160)
1,008
136
1,144
Total
(5,107)
1,413
284
1,697
Reclassification of accumulated other comprehensive income
to retained earnings due to statutory tax changes
Ending balance at December 31, 2017
(300)
$ (1,694)
(436)
(2,452)
(736)
(4,146)
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)
(u) 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.
(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
98
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 Company can apply the guidance
using a full retrospective approach or a modified retrospective approach. The Company’s revenue is comprised of net
interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as
many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly,
the majority of the Company’s revenues will not be affected. The guidance 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 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 available for sale 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. The
Company does not expect these amendments to 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
were effective for the Company on January 1, 2017. The Company will apply the guidance prospectively to any
increases in the level of ownership interest or degree of influence that result in the adoption of the equity method.
The Company’s adoption of this amendment did not 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
99
intrinsic value. The amendments were effective for the Company on January 1, 2017 and the adoption of this
amendment did not 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 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 Company will apply the amendments through a
cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is
permitted beginning in first quarter 2019, the Company does not expect to elect that option. The updated guidance is
effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently
evaluating the impact of this guidance on its consolidated financial statements; however, the Company expects the
adoption of this guidance will result in an increase in the recorded allowance for loan losses.
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 were effective
for the Company on January 1, 2017 and the Company’s adoption of this amendment did not have a material effect
on its financial statements.
In January 2017, the FASB issued guidance to clarify the definition of a business in the Business Combinations topic of
the Accounting Standards Codification 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 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 this amendment to have a material effect on its financial
statements.
In January 2017, the FASB issued amended the Goodwill and Other Intangibles topic of the Accounting Standards
Codification to simplify the accounting for goodwill impairment for public business entities and other entities that
have goodwill reported in their financial statements and have not elected the private company alternative for the
subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. The amount
of goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to
exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections
will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The
Company does not expect this amendment to have a material effect on its financial statements.
In March 2017, the FASB amended the requirements in the Compensation—Retirement Benefits topic of the
Accounting Standards Codification related to the income statement presentation of the components of net periodic
benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The amendments
require that an employer report the service cost component in the same line item or items as other compensation
costs arising from services rendered by pertinent employees during the period. The other components of net periodic
benefit cost are required to be presented in the income statement separately from the service cost component. The
amendments will be effective for the Company for interim and annual 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 March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs topic
of the Accounting Standards Codification related to the amortization period for certain purchased callable debt
securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call
100
date. The amendments will be effective for the Company for interim and annual periods beginning after December
15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on
its financial statements.
In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the
Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award.
The amendments provide guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting. The amendments will be effective for the Company for annual
periods, and interim periods within those annual 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 February 2018, the FASB issued guidance related to the Income Statement – Reporting Comprehensive Income
topic, which allows a reclassification from accumulated other comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017, which was signed into law on December 22,
2017. The guidance will be effective for all annual and interim periods beginning January 1, 2019, with early adoption
permitted. The Company chose to early adopt the new standard for the year ending December 31, 2017, as allowed
under the new standard. The amount of the reclassification for the Company was $0.7 million, as shown in the
Consolidated Statement of Changes in Stockholder's Equity.
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 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, Inc. (“SBA Complete”). The
results of SBA Complete are included in the Company’s results 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 Small Business Administration (“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 recorded an earn-out liability initially 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.
101
This acquisition was 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 originally recorded $5.6 million in goodwill,
which was non-deductible for tax purposes, and $2.0 million in other amortizable intangible assets.
In the second quarter of 2017, the Company recorded a measurement period adjustment to reduce the earn-
out liability and goodwill by $1.2 million based on the availability of new information that provided a more
reliable estimate of the most likely earn-out.
(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 the 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 results of Carolina Bank are included in First Bancorp’s results
beginning on the March 3, 2017 acquisition date.
Carolina Bank Holdings, Inc. was the parent company of Carolina Bank, a North Carolina state-chartered bank
with eight bank branches located in the North Carolina cities of Greensboro, High Point, Burlington, Winston-
Salem, and Asheboro, and mortgage offices in Burlington, Hillsborough, and Sanford. The acquisition
complements the Company’s recent expansion into several of these high-growth markets and increases its
market share in others with facilities, operations and experienced staff already in place. The Company was
willing to record goodwill primarily due to the reasons just noted, as well as the positive earnings of Carolina
Bank. The total merger consideration consisted of $25.3 million in cash and 3,799,471 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. The issuance of common stock was valued at $114.5 million and was based on the Company’s
closing stock price on March 3, 2017 of $30.13 per share.
This acquisition was accounted for using the purchase method of accounting for business combinations, and
accordingly, the assets and liabilities of Carolina Bank were recorded based on estimates of fair values as of
March 3, 2017. The Company may change its valuations of acquired Carolina Bank assets and liabilities for up
102
to one year after the acquisition date, and is currently awaiting information related to a contingent liability
that was assumed in the acquisition. The table below is a condensed balance sheet disclosing the amount
assigned to each major asset and liability category of Carolina Bank on March 3, 2017, and the related fair
value adjustments recorded by the Company to reflect the acquisition. The $65.5 million in goodwill that
resulted from this transaction is non-deductible for tax purposes.
($ in thousands)
Assets
Cash and cash equivalents
Securities
Loans, gross
Allowance for loan losses
Premises and equipment
Core deposit intangible
Other
Total
Liabilities
Deposits
Borrowings
Other
Total
Net identifiable assets acquired
Total cost of acquisition
Value of stock issued
Cash paid in the acquisition
Total cost of acquisition
As
Recorded by
Carolina Bank
Initial Fair
Value
Adjustments
Measurement
Period
Adjustments
As
Recorded by
First Bancorp
$ 81,466
49,629
505,560
(5,746)
17,967
–
34,976
683,852
$ 584,950
21,855
12,855
619,660
(2)
(261)
(5,469)
(2,715)
5,746
4,251
8,790
(4,804)
5,536
431
(2,855)
225
(2,199)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
−
−
146
−
−
(319)
−
2,225
2,052
−
(262)
−
(262)
(l)
(m)
(n)
(o)
$ 114,478
25,279
81,464
49,368
497,522
̶
21,899
8,790
32,397
691,440
585,381
18,738
13,080
617,199
74,241
139,757
$ 65,516
Goodwill recorded related to acquisition of Carolina Bank
Explanation of Fair Value Adjustments
(a) This adjustment was recorded to a short-term investment to its estimated fair value.
(b) This fair value adjustment was recorded to adjust the securities portfolio to its estimated fair value.
(c) This fair value adjustment represents the amount necessary to reduce performing loans to their fair value
due to interest rate factors and credit factors. Assuming the loans continue to perform, this amount will be
amortized to increase interest income over the remaining lives of the related loans.
(d) This fair value adjustment was recorded to write-down purchased credit impaired loans assumed in the
acquisition to their estimated fair market value.
(e) This fair value adjustment reduced the allowance for loan losses to zero as required by relevant accounting
guidance.
(f) This adjustment represents the amount necessary to increase premises and equipment from its book value
on the date of acquisition to its estimated fair market value.
(g) This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on
a study performed by an independent consulting firm. This amount was recorded by the Company as an
identifiable intangible asset and will be amortized as expense on an accelerated basis over seven years.
(h) This fair value adjustment primarily represents the net deferred tax liability associated with the other fair
value adjustments made to record the transaction.
(i) This fair value adjustment was recorded because the weighted average interest rate of Carolina Bank’s time
deposits exceeded the cost of similar wholesale funding at the time of the acquisition. This amount will be
amortized to reduce interest expense on an accelerated basis over their remaining five year life.
(j) This fair value adjustment was primarily recorded because the interest rate of Carolina Bank’s trust preferred
security was less than the current interest rate on similar instruments. This amount will be amortized on
approximately a straight-line basis to increase interest expense over the remaining life of the related
borrowing, which is 18 years.
103
(k) This fair value adjustment represents miscellaneous adjustments needed to record assets and liabilities at
their fair value.
(l) This fair value adjustment was a miscellaneous adjustment to increase the initial fair value of gross loans.
(m) This fair value adjustment relates to miscellaneous adjustment to decrease the initial fair value of premises
and equipment.
(n) This fair value adjustment relates to changes in the estimate of deferred tax assets/liabilities associated with
the acquisition and a miscellaneous adjustment to decrease the initial fair value of foreclosed real estate
acquired in the transaction.
(o) This fair value adjustment relates to miscellaneous adjustments to decrease the initial fair value of
borrowings.
The following unaudited pro forma financial information presents the combined results of the Company and
Carolina Bank as if the acquisition had occurred as of January 1, 2016, after giving effect to certain adjustments,
including amortization of the core deposit intangible, and related income tax effects. The pro forma financial
information does not necessarily reflect the results of operations that would have occurred had the Company
and Carolina Bank constituted a single entity during such period.
($ in thousands, except share data)
Net interest income
Noninterest income
Total revenue
Net income available to common shareholders
Earnings per common share
Basic
Diluted
Pro Forma Combined
Year Ended
December 31,
2017
Pro Forma Combined
Year Ended
December 31,
2016
$ 168,759
50,098
218,857
49,907
$ 1.93
1.92
147,089
36,684
183,773
25,364
1.07
1.03
For purposes of the supplemental pro forma information, merger-related expenses of $5.2 million that were
recorded in the Company’s consolidated statements of income for the year ended December 31, 2017 and $4.6
million of merger-related expenses that were recorded by Carolina Bank in 2017 prior to the merger date are
reflected above in the pro forma presentation for 2016.
(5) On September 1, 2017, First Bank Insurance completed the acquisition of Bear Insurance Service (“Bear
Insurance”). The results of Bear Insurance are included the Company’s results beginning on the September 1,
2017 acquisition date.
Bear Insurance, an insurance agency based in Albemarle, North Carolina, with four locations in Stanly,
Cabarrus, and Montgomery counties and annual commission income of approximately $4 million, represented
an opportunity to complement the insurance agency operations in these markets and the surrounding areas.
Also, this acquisition provided the Company with a larger platform for leveraging insurance services
throughout the Company’s bank branch network. The transaction value was $9.8 million and the transaction
was completed on September 1, 2017 with the Company paying $7.9 million in cash and issuing 13,374 shares
of its common stock, which had a value of approximately $0.4 million. Per the terms of the agreement, the
Company also recorded an earn-out liability valued at $1.2 million, which will be paid as a cash distribution
after a four-year period if pre-determined goals are met for the periods.
This acquisition was accounted for using the purchase method of accounting for business combinations, and
accordingly, the assets and liabilities of Bear Insurance were recorded based on estimates of fair values as of
September 1, 2017. In connection with this transaction, the Company recorded $5.3 million in goodwill, which
is deductible for tax purposes, and $3.9 million in other amortizable intangible assets, which are also
deductible for tax purposes.
104
(6) On October 1, 2017, the Company completed the acquisition of ASB Bancorp, Inc. (“Asheville Savings Bank”),
headquartered in Asheville, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization
dated May 1, 2017. The results of Asheville Savings Bank are included in First Bancorp’s results beginning on
the October 1, 2017 acquisition date.
ASB Bancorp, Inc. was the parent company of Asheville Savings Bank, a North Carolina state-chartered bank
with eight bank branches located in Buncombe County, North Carolina and five bank branches located in the
counties of Henderson, Madison, McDowell and Transylvania, all in North Carolina. The acquisition
complements the Company’s existing presence in the Asheville and surrounding markets, which are high-
growth and highly desired markets. The Company was willing to record goodwill primarily due to the reasons
just noted, as well as the positive earnings of Asheville Savings Bank. The total merger consideration consisted
of $17.9 million in cash and 4,920,061 shares of the Company’s common stock, with each share of Asheville
Savings Bank common stock being exchanged for either $41.90 in cash or 1.44 shares of the Company’s stock,
subject to the total consideration being 90% stock / 10% cash. The issuance of common stock was valued at
$169.3 million and was based on the Company’s closing stock price on September 30, 2017 of $34.41 per
share.
This acquisition was accounted for using the purchase method of accounting for business combinations, and
accordingly, the assets and liabilities of Asheville Savings Bank were recorded based on estimates of fair values
as of October 1, 2017. The Company may change its valuations of acquired Asheville Savings Bank assets and
liabilities for up to one year after the acquisition date. The table below is a condensed balance sheet
disclosing the amount assigned to each major asset and liability category of Asheville Savings Bank on October
1, 2017, and the related fair value adjustments recorded by the Company to reflect the acquisition. The $88.4
million in goodwill that resulted from this transaction is non-deductible for tax purposes.
As Recorded by
Asheville Savings
Bank
Initial Fair
Value
Adjustments
Measurement
Period
Adjustments
As
Recorded by
First Bancorp
($ in thousands)
Assets
Cash and cash equivalents
Securities
Loans, gross
Allowance for loan losses
Presold mortgages
Premises and equipment
Core deposit intangible
Other
Total
Liabilities
Deposits
Borrowings
Other
Total
Net identifiable assets acquired
Total cost of acquisition
Value of stock issued
Cash paid in the acquisition
Total cost of acquisition
Goodwill recorded related to acquisition of Asheville Savings Bank
$ 41,824
95,020
617,159
(6,685)
3,785
10,697
–
35,944
797,744
$ 678,707
20,000
8,943
707,650
-
-
(9,631)
(1,348)
6,685
-
9,857
9,760
(5,851)
9,472
430
-
298
728
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
−
−
−
−
−
−
−
−
−
−
−
−
−
−
$ 169,299
17,939
105
41,824
95,020
606,180
̶
3,785
20,554
9,760
30,093
807,216
679,137
20,000
9,241
708,378
98,838
187,238
$ 88,400
Explanation of Fair Value Adjustments
(a) This fair value adjustment represents the amount necessary to reduce performing loans to their fair value
due to interest rate factors and credit factors. Assuming the loans continue to perform, this amount will be
amortized to increase interest income over the remaining lives of the related loans.
(b) This fair value adjustment was recorded to write-down purchased credit impaired loans assumed in the
acquisition to their estimated fair market value.
(c) This fair value adjustment reduced the allowance for loan losses to zero as required by relevant accounting
guidance.
(d) This adjustment represents the amount necessary to increase premises and equipment from its book value
on the date of acquisition to its estimated fair market value.
(e) This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on
a study performed by an independent consulting firm. This amount was recorded by the Company as an
identifiable intangible asset and will be amortized as expense on an accelerated basis over seven years.
(f) This fair value adjustment primarily represents the net deferred tax liability associated with the other fair
value adjustments made to record the transaction.
(g) This fair value adjustment was recorded because the weighted average interest rate of Asheville Savings
Bank’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition. This
amount will be amortized to reduce interest expense on an accelerated basis over their remaining five year
life.
(h) This fair value adjustment represents miscellaneous adjustments needed to record assets and liabilities at
their fair value.
The following unaudited pro forma financial information presents the combined results of the Company and
Asheville Savings Bank as if the acquisition had occurred as of January 1, 2016, after giving effect to certain
adjustments, including amortization of the core deposit intangible, and related income tax effects. The pro
forma financial information does not necessarily reflect the results of operations that would have occurred
had the Company and Asheville Savings Bank constituted a single entity during such period.
($ in thousands, except share data)
Net interest income
Noninterest income
Total revenue
Net income available to common shareholders
Earnings per common share
Basic
Diluted
Pro Forma Combined
Twelve Months Ended
December 31, 2017
Pro Forma Combined
Twelve Months Ended
December 31, 2016
$ 183,996
54,523
238,391
51,600
$ 1.79
1.78
147,284
34,307
181,591
12,291
0.49
0.48
For purposes of the supplemental pro forma information, merger-related expenses of $2.7 million that were
recorded in the Company’s consolidated statements of income for the twelve months ended December 31,
2017 and $20.4 million of merger-related expenses that were recorded by Asheville Savings Bank in 2017
prior to the merger date are reflected above in the pro forma presentation for 2016.
106
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2017 and 2016 are
summarized as follows:
($ 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
2017
2016
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
$ 14,000
297,690
33,792
–
$ 345,482
13,867
295,213
34,190
−
343,270
−
246
512
−
758
(133)
(2,722)
(114)
–
(2,969)
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)
$ 63,829
54,674
$ 118,503
63,092
55,906
118,998
−
1,280
1,280
(737)
(48)
(785)
80,585
49,128
129,713
79,283
50,912
130,195
̶
1,815
1,815
(1,302)
(31)
(1,333)
All of the Company’s mortgage-backed securities, including commercial mortgage-backed obligations, were issued by
government-sponsored corporations, except for one private mortgage-backed security with a fair value of $0.5
million as of December 31, 2017.
The following table presents information regarding securities with unrealized losses at December 31, 2017:
($ in thousands)
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
State and local governments
Total temporarily impaired securities
$ 10,897
192,702
2,500
7,928
$ 214,027
103
1,582
49
48
1,782
2,970
125,060
935
–
128,965
30
1,877
65
–
1,972
13,867
317,762
3,435
7,928
342,992
133
3,459
114
48
3,754
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
In the above tables, all of the non-equity securities that were in an unrealized loss position at December 31, 2017 and
2016 are bonds that the Company has determined are in a loss position due primarily to interest rate factors and not
credit quality concerns. The Company has evaluated the collectability of each of these bonds and has concluded that
107
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 also concluded that each of the equity securities in an unrealized loss position at December 31,
2016 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, 2017, 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
$ −
15,007
27,785
5,000
297,690
345,482
̶
$ 345,482
−
14,905
28,042
5,110
295,213
343,270
̶
343,270
$ 2,257
23,285
23,502
5,630
63,829
118,503
̶
$ 118,503
2,258
23,795
24,219
5,634
63,092
118,998
̶
118,998
At December 31, 2017 and 2016, investment securities with carrying values of $176,813,000 and $147,009,000,
respectively, were pledged as collateral for public deposits.
In 2017, the Company received proceeds from sales of securities of $140,621,000 and recorded $235,000 in losses
from the sales. 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.
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 $31,338,000 and $19,826,000 at
December 31, 2017 and 2016, respectively. The FHLB stock had a cost and fair value of $19,647,000 and $12,588,000
at December 31, 2017 and 2016, 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
$11,691,000 and $7,238,000 at December 31, 2017 and 2016, respectively, and is a requirement for FRB member
bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the
Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither
stock was impaired at either period end.
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 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.
108
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.
On March 3, 2017, the Company acquired Carolina Bank (see Note 2 for more information). As a result of this
acquisition, the Company recorded loans with a fair value of $497.5 million. Of those loans, $19.3 million were
considered to be purchased credit impaired (“PCI”) loans, which are loans for which it is probable at acquisition date
that all contractually required payments will not be collected. The remaining loans are considered to be purchased
non-impaired loans and their related fair value discount or premium is recognized as an adjustment to yield over the
remaining life of each loan.
The following table relates to acquired Carolina Bank PCI loans and summarizes the contractually required payments,
which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at
the acquisition date.
($ in thousands)
Contractually required payments
Nonaccretable difference
Cash flows expected to be collected at acquisition
Accretable yield
Fair value of PCI loans at acquisition date
Carolina Bank Acquisition
on March 3, 2017
$ 27,108
(4,237)
22,871
(3,617)
$ 19,254
The following table relates to acquired Carolina Bank purchased non-impaired loans and provides the contractually
required payments, fair value, and estimate of contractual cash flows not expected to be collected at the acquisition
date.
($ in thousands)
Contractually required payments
Fair value of acquired loans at acquisition date
Contractual cash flows not expected to be collected
Carolina Bank Acquisition
on March 3, 2017
$ 569,980
478,515
3,650
On October 1, 2017, the Company acquired Asheville Savings Bank (see Note 2 for more information). As a result of
this acquisition, the Company recorded loans with a fair value of $606.2 million. Of those loans, $9.9 million were
considered to be purchased credit impaired (“PCI”) loans, which are loans for which it is probable at acquisition date
that all contractually required payments will not be collected. The remaining loans are considered to be purchased
non-impaired loans and their related fair value discount or premium is recognized as an adjustment to yield over the
remaining life of each loan.
The following table relates to acquired Asheville Savings Bank PCI loans and summarizes the contractually required
payments, which includes principal and interest, expected cash flows to be collected, and the fair value of acquired
PCI loans at the acquisition date.
($ in thousands)
Contractually required payments
Nonaccretable difference
Cash flows expected to be collected at acquisition
Accretable yield
Fair value of PCI loans at acquisition date
Asheville Savings Bank
Acquisition on
October 1, 2017
$ 13,424
(1,734)
11,690
(1,804)
$ 9,886
109
The following table relates to acquired Asheville Savings Bank purchased non-impaired loans and provides the
contractually required payments, fair value, and estimate of contractual cash flows not expected to be collected at
the acquisition date.
($ in thousands)
Contractually required payments
Fair value of acquired loans at acquisition date
Contractual cash flows not expected to be collected
Asheville Savings Bank
Acquisition on
October 1, 2017
$ 727,706
595,167
7,000
The following is a summary of the major categories of total loans outstanding:
($ in thousands)
All loans:
December 31, 2017
December 31, 2016
Amount
Percentage
Amount
Percentage
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 /
$ 381,130
10%
$ 261,813
539,020
972,772
13%
24%
354,667
750,679
lines of credit
379,978
9%
239,105
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs (fees)
Total loans
1,696,107
74,348
4,043,355
(986)
$ 4,042,369
42%
2%
100%
1,049,460
55,037
2,710,761
(49)
$ 2,710,712
9%
13%
28%
9%
39%
2%
100%
Loans in the amount of $3.6 billion and $2.4 billion were pledged as collateral for certain borrowings as of December
31, 2017 and December 31, 2016, respectively (see Note 10).
The loans above also include loans to executive officers and directors serving the Company at December 31, 2017 and
to their associates, totaling approximately $3.6 million and $2.6 million at December 31, 2017 and 2016, respectively.
During 2017, net repayments to such loans were approximately $0.6 million. These loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with other non-related borrowers. Management does not believe these loans involve more than the normal risk of
collectability or present other unfavorable features.
The following table presents information regarding covered purchased non-impaired loans since January 1, 2015. The
amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond. All
balances of covered loans were transferred to non-covered as of the termination of the loss share agreements.
($ in thousands)
Carrying amount of non-impaired covered loans at January 1, 2015
Principal repayments
Transfers to foreclosed real estate
Net loan recoveries
Accretion of loan discount
Carrying amount of non-impaired covered loans at January 1, 2016
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 non-impaired covered loans at December 31, 2016
110
$ 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 of December 31, 2017 and 2016, there was a remaining accretable discount of $21.5 million and $12.1 million,
respectively, related to purchased non-impaired loans.
The following table presents changes in the carrying value of PCI loans.
($ in thousands)
Purchased Credit Impaired Loans
Balance at beginning of period
Additions due to acquisition of Carolina Bank
Additions due to acquisition of Asheville Savings Bank
Change due to payments received and accretion
Change due to loan charge-offs
Transfers to foreclosed real estate
Other
Balance at end of period
For the Year
Ended
December 31,
2017
$ 514
19,254
9,886
(6,016)
(12)
(69)
(392)
$ 23,165
For the Year
Ended
December 31,
2016
1,970
−
−
(1,386)
(70)
−
−
514
The following table presents changes in the accretable yield for PCI loans.
($ in thousands)
Accretable Yield for PCI loans
Balance at beginning of period
Additions due to acquisition of Carolina Bank
Additions due to acquisition of Asheville Savings Bank
Accretion
Reclassification from (to) nonaccretable difference
Other, net
Balance at end of period
For the Year
Ended
December 31,
2017
$ −
3,617
1,804
(1,846)
423
690
$ 4,688
For the Year
Ended
December 31,
2016
−
−
−
−
−
−
−
During 2017, the Company received $1,064,000 in payments that exceeded the carrying amount of the related
purchased credit impaired loans, of which $962,000 was recognized as loan discount accretion income and $102,000
was recorded as additional loan interest income. During 2016, the Company received $1,160,000 in payments that
exceeded the carrying amount of the related PCI loans, of which $786,000 was recognized as loan discount accretion
income, $296,000 was recorded as additional loan interest income, and $78,000 was recorded as a recovery.
Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still
accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are
summarized as follows:
ASSET QUALITY DATA ($ 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,
2017
December 31,
2016
$ 20,968
19,834
40,802
12,571
$ 53,373
27,468
22,138
49,606
9,532
59,138
Purchased credit impaired loans not included above (1)
$ 23,165
–
____________________________________________________________________________________________________
(1) In the March 3, 2017 acquisition of Carolina Bank. and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9
million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.6 million in
PCI loans at December 31, 2017 that are contractually past due 90 days or more.
111
At December 31, 2017 and 2016, the Company had $0.8 million and $1.7 million in residential mortgage loans in
process of foreclosure, respectively.
If the nonaccrual and restructured loans as of December 31, 2017, 2016 and 2015 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 $1,503,000, $1,893,000, and $3,213,000 for
nonaccrual loans and $1,182,000, $1,417,000, and $2,044,000, for restructured loans would have been recorded for
2017, 2016, and 2015, respectively. Interest income on such loans that was actually collected and included in net
income in 2017, 2016 and 2015 amounted to approximately $415,000, $266,000, and $575,000 for nonaccrual loans
(prior to their being placed on nonaccrual status), and $297,000, $423,000, and $1,392,000 for restructured loans,
respectively. At December 31, 2017 and 2016, there were no commitments to lend additional funds to debtors
whose loans were nonperforming.
The following is a summary the Company’s nonaccrual loans by major categories.
($ 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
December 31,
2017
$ 1,001
1,822
12,201
2,524
3,345
75
$ 20,968
December 31,
2016
1,842
2,945
16,017
2,355
4,208
101
27,468
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2017.
($ in thousands)
Accruing
30-59 Days
Past Due
Accruing 60-
89 Days
Past Due
Accruing 90
Days or More
Past Due
Nonaccrual
Loans
Accruing
Current
Total Loans
Receivable
Commercial, financial, and agricultural
Real estate – construction, land development &
$ 89
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
Purchased credit impaired
Total
Unamortized net deferred loan fees
Total loans
1,154
6,777
1,347
1,270
445
821
$ 11,903
151
214
1,370
10
451
95
77
2,368
–
–
–
–
–
–
601
601
1,001
379,241
380,482
1,822
535,423
538,613
12,201
943,565
963,913
2,524
3,345
75
–
20,968
375,814
1,678,529
73,277
21,666
4,007,515
379,695
1,683,595
73,892
23,165
4,043,355
(986)
$ 4,042,369
112
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2016.
($ in thousands)
Accruing
30-59 Days
Past Due
Accruing
60-89 Days
Past Due
Accruing 90
Days or More
Past Due
Nonaccrual
Loans
Accruing
Current
Total Loans
Receivable
Commercial, financial, and agricultural
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
Purchased credit impaired
Total
Unamortized net deferred loan fees
Total loans
$ 92
473
4,487
1,751
1,482
186
–
$ 8,471
–
168
443
178
449
193
–
1,431
–
–
–
–
–
–
–
–
1,842
259,879
261,813
2,945
351,081
354,667
16,017
729,732
750,679
2,355
4,208
101
–
27,468
234,821
1,042,807
54,557
514
2,673,391
239,105
1,048,946
55,037
514
2,710,761
(49)
$ 2,710,712
113
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2017.
There were no covered loans at December 31, 2017 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
Commercial,
Financial, and
Agricultural
Real Estate –
Residential
(1-4 Family)
First
Mortgages
Real Estate
– Mortgage
– Home
Equity Lines
of Credit
Real Estate
– Mortgage
–
Commercial
and Other
Install-
ment
Loans to
Individuals
Unallo-
cated
Total
As of and for the year ended December 31, 2017
Beginning
balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 3,829
(1,622)
1,311
(407)
$ 3,111
2,691
(589)
2,579
(1,865)
2,816
7,704
(2,641)
1,076
8
6,147
2,420
(978)
333
52
1,827
5,098
(1,182)
1,027
1,532
6,475
1,145
(799)
279
325
950
894
−
−
1,078
1,972
23,781
(7,811)
6,605
723
23,298
Ending balances as of December 31, 2017: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Purchased credit
impaired
$ −
$ 2,896
$ 215
2,798
4,831
1,099
217
18
−
−
232
−
−
1,564
1,788
6,226
950
1,972
21,461
39
17
−
−
−
−
−
−
273
4,043,355
(986)
$ 4,042,369
27,215
3,992,975
23,165
Loans receivable as of December 31, 2017:
Ending balance –
total
Unamortized net
deferred loan
fees
Total loans
$ 381,130
539,020
Ending balances as of December 31, 2017: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Purchased credit
impaired
$ 648
$ 579
$ 379,903
535,638
2,975
407
972,772
379,978
1,696,107
74,348
14,800
368
8,493
−
949,113
379,327
1,675,102
73,892
8,859
283
12,512
456
114
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 have
been 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
Real Estate
– Mortgage
–
Commercial
and Other
Commercial,
Financial, and
Agricultural
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
56
(39)
(1,410)
2,691
3,754
(1,101)
1,422
65
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
Ending balances as of December 31, 2016: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Purchased credit
impaired
$ −
$ 7
$ 3,822
2,507
6,365
1,339
184
−
−
5
105
−
−
2,415
4,993
1,145
894
−
−
−
Loans receivable as of December 31, 2016:
Ending balance –
total
Unamortized net
deferred loan fees
Total loans
$ 261,813
354,667
750,679
239,105
1,049,460
55,037
Ending balances as of December 31, 2016: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Purchased credit
impaired
$ −
$ 644
$ 261,169
4,001
350,666
20,807
280
6,494
−
729,872
238,825
1,042,452
55,037
−
−
−
514
−
115
–
–
−
−
−
−
−
1,640
22,141
−
2,710,761
(49)
$ 2,710,712
32,226
2,678,021
514
−
−
−
−
−
The following table presents loans individually evaluated for impairment by class of loans, excluding purchased credit
impaired loans, as of December 31, 2017.
($ in thousands)
Impaired loans with no related 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 no allowance
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
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
$ 183
425
2,743
3,941
5,205
368
3,066
−
$ 11,565
$ 396
232
9,595
−
5,427
−
$ 15,650
5,728
387
3,321
−
13,802
396
241
9,829
−
5,427
−
15,893
−
−
−
−
−
−
−
215
18
1,099
−
232
−
1,564
276
2,846
7,067
129
3,143
−
13,461
214
503
10,077
66
5,369
−
16,229
Interest income recorded on impaired loans during the year ended December 31, 2017 was insignificant.
The following table presents loans individually evaluated for impairment by class of loans, excluding purchased credit
impaired loans, as of December 31, 2016.
($ in thousands)
Impaired loans with no related 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 no allowance
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
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
$ 593
706
3,221
4,558
10,035
114
4,598
−
$ 18,561
$ 51
780
10,772
166
1,896
−
$ 13,665
12,220
146
5,112
2
22,744
51
798
11,007
166
1,929
−
13,951
−
−
−
−
−
−
−
7
184
1,339
5
105
−
1,640
816
3,641
11,008
139
8,165
1
23,770
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.
116
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 (<$500,000) with a well-defined weakness, such as exceptions of any kind
with no mitigating factors, history of paying outside the terms of the note, insufficient income
to support the current level of debt, etc.
Special Mention:
Classified:
117
The following table presents the Company’s recorded investment in loans by credit quality indicators as of December
31, 2017.
($ 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
Purchased credit impaired
Total
Unamortized net deferred loan fees
Total loans
Pass
Special Mention
Loans
Classified
Accruing Loans
$ 368,658
523,642
905,111
365,982
1,647,725
73,379
6,541
$ 3,891,038
9,901
7,129
16,235
3,784
23,335
222
12,309
72,915
922
6,020
30,366
7,405
9,190
216
4,315
58,434
Classified
Nonaccrual
Loans
1,001
1,822
Total
380,482
538,613
12,201
963,913
2,524
379,695
3,345
75
−
20,968
1,683,595
73,892
23,165
4,043,355
(986)
4,042,369
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
Purchased credit impaired
Total
Unamortized net deferred loan fees
Total loans
Troubled Debt Restructurings
Pass
Special Mention
Loans
Classified
Accruing Loans
$ 247,451
335,068
678,878
226,159
1,005,687
54,421
−
$ 2,547,664
10,560
8,762
16,998
1,436
26,032
256
514
64,558
1,960
7,892
38,786
9,155
13,019
259
−
71,071
Classified
Nonaccrual
Loans
1,842
2,945
Total
261,813
354,667
16,017
750,679
2,355
239,105
4,208
101
−
27,468
1,048,946
55,037
514
2,710,761
(49)
2,710,712
The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing
financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions
or below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended
to minimize potential losses.
The vast majority of the Company’s troubled debt restructurings modified during the years ended December 31, 2017
and 2016 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
118
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, 2017 and 2016.
($ 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, 2017
For the year ended
December 31, 2016
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
Number of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
Number of
Contracts
−
−
−
−
5
−
1
1
1
−
−
−
8
–
$ −
$ −
−
−
−
3,550
−
38
32
215
−
−
−
−
−
−
3,525
−
25
32
215
−
−
−
$ 3,835
$ 3,797
–
–
1
−
1
−
−
−
−
−
1
−
−
−
3
–
$ 1,071
$ 1,071
−
598
−
−
−
−
−
−
626
−
−
−
−
−
155
184
−
−
−
−
−
−
$ 1,824
$ 1,881
–
–
Accruing restructured loans that were modified in the previous 12 months and that defaulted during the years ended
December 31, 2017 and 2016 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
For the year ended
December 31, 2017
For the year ended
December 31, 2016
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
−
2
−
2
−
$ −
880
−
$ 880
$ −
2
−
1
3
1
$ 744
−
21
$ 765
$ 44
119
Note 5. Premises and Equipment
Premises and equipment at December 31, 2017 and 2016 consisted of the following:
($ in thousands)
2017
2016
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
$ 38,821
92,337
35,532
2,409
169,099
(52,866)
$ 116,233
23,404
67,032
37,780
2,192
130,408
(55,057)
75,351
As discussed previously in Note 4 – Loans and Asset Quality Information, the Company terminated all loss share
agreements with the FDIC effective September 22, 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.
The following presents a rollforward of the FDIC indemnification asset from January 1, 2015 through the date of
termination.
($ in thousands)
Balance at January 1, 2015
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
$ 22,569
(3,031)
1,232
(6,673)
(5,584)
(406)
332
$ 8,439
(2,246)
205
1,554
(2,005)
(236)
(5,711)
$ ―
120
Note 7. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible
assets as of December 31, 2017 and December 31, 2016 and the carrying amount of unamortized intangible assets as
of those same dates.
($ in thousands)
Amortized intangible assets:
Customer lists
Core deposit intangibles
SBA servicing asset
Other
Total
Unamortized intangible assets:
Goodwill
December 31, 2017
December 31, 2016
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
$ 6,013
28,280
2,194
1,303
$ 37,790
1,090
11,475
207
581
13,353
2,369
9,730
415
1,032
13,546
746
8,143
−
224
9,113
$ 233,070
75,042
Activity related to transactions since January 1, 2016 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., the Company recorded $4,333,000 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 on July 15, 2016, the
Company recorded a net increase of $1,961,000 in goodwill and $1,170,000 in core deposit premiums.
(4) In connection with the Carolina Bank acquisition on March 3, 2017, the Company recorded a net increase of
$65,516,000 in goodwill and $8,790,000 in a core deposit intangible.
(5) In connection with the September 1, 2017 acquisition of Bear Insurance Service, the Company recorded
$5,330,000 in goodwill, $3,644,000 in a customer list intangible, and $271,000 in other amortizable intangible
assets.
(6) In connection with the Asheville Savings Bank acquisition on October 1, 2017, the Company recorded a net
increase of $88,400,000 in goodwill and $9,760,000 in a core deposit intangible.
In addition to the above acquisition related activity, the Company recorded $1,779,000 and $415,000 in servicing
assets associated with the guaranteed portion of SBA loans originated and sold during 2017 and 2016, respectively.
During 2017, the Company recorded $207,000 in related amortization expense, while in 2016 the amount was
insignificant. Servicing assets are recorded at fair value and amortized over the expected lives of the related loans.
Amortization expense of all intangible assets totaled $4,240,000, $1,211,000 and $722,000 for the years ended
December 31, 2017, 2016 and 2015, respectively.
Goodwill is evaluated for impairment on at least an annual basis – see Note 1(s). For each of the years presented, the
Company’s evaluation indicated that there was no goodwill impairment.
The following table presents the estimated amortization expense related to amortizable intangible assets, excluding
SBA servicing assets, for each of the five calendar years ending December 31, 2022 and the estimated amount
amortizable thereafter. These estimates are subject to change in future periods to the extent management
determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible
assets.
121
($ in thousands)
2018
2019
2020
2021
2022
Thereafter
Total
Estimated
Amortization Expense
$ 5,917
4,858
3,841
2,927
2,022
2,885
$ 22,450
Note 8. Income Taxes
Total income taxes for the years ended December 31, 2017, 2016, and 2015 were allocated as follows:
($ In thousands)
2017
2016
2015
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
$ 21,767
14,624
14,126
321
668
$ 22,756
(685)
(36)
13,903
(184)
(1,716)
12,226
The components of income tax expense for the years ended December 31, 2017, 2016, and 2015 are as follows:
($ In thousands)
Current - Federal
- State
Deferred - Federal
- State
Total
2017
2016
2015
$ 11,286
1,996
7,742
743
$ 21,767
12,827
1,679
16
102
14,624
9,149
1,436
3,205
336
14,126
122
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets
(liabilities) at December 31, 2017 and 2016 are presented below:
($ In thousands)
2017
2016
Deferred tax assets:
Allowance for loan losses
Excess book over tax pension 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
SBA servicing asset
All other
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Loan fees
Excess book over tax pension plan cost
Depreciable basis of fixed assets
Amortizable basis of intangible assets
FHLB stock dividends
Trust preferred securities
Purchase accounting adjustments
All other
Gross deferred tax liabilities
Net deferred tax asset (liability) - included in other assets
$ 5,448
−
1,220
2,125
2,546
748
740
1,311
248
232
517
139
42
15,316
(44)
15,272
(1,880)
(95)
(3,122)
(7,915)
(658)
(616)
(2,133)
(28)
(16,447)
$ (1,175)
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
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 2017 and 2016 deferred tax expense (benefit) of approximately $321,000 and
($685,000) 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 2017 and 2016 deferred tax expense
(benefit) of $668,000 and ($36,000) respectively, has been recorded directly to shareholders’ equity. The change in
the net deferred tax liability was also impacted by the recording of a net deferred tax asset of approximately
$4,146,000 relating to acquisition transactions that occurred during the year. The balance of the 2017 increase in the
net deferred tax liability of $8,485,000 is reflected as a deferred income tax expense, and the balance of the 2016
decrease in the net deferred tax asset of $118,000 is reflected as a deferred income tax expense in the consolidated
statement of income.
The valuation allowances for 2017 and 2016 relate primarily to state net operating loss carryforwards. It is
management’s belief that the realization of the remaining net deferred tax assets is more likely than not. The
Company adjusted its net deferred income tax asset as a result of reductions in the North Carolina income tax rate,
which reduced the state income tax rate to 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
123
2013. There are no indications of any material adjustments relating to any examination currently being conducted by
any taxing authority.
Retained earnings at December 31, 2017 and 2016 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)
2017
2016
2015
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
Impact of tax reform
Other, net
Total
$ 23,709
14,746
14,405
(1,461)
(596)
24
1,780
(1)
(1,269)
(419)
$ 21,767
(1,202)
(192)
16
1,158
(24)
−
122
14,624
(930)
(191)
11
1,152
(58)
−
(263)
14,126
On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act permanently reduced the
corporate tax rate to 21% from the prior maximum rate of 35%, effective for tax years including or commencing
January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, companies are required to revalue their
deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the fourth
quarter of 2017. The Company continues to evaluate the impact on its 2017 tax expense/benefit of the revaluation
required by the lower corporate tax rate implemented by the Tax Act, which management has estimated to be a tax
benefit between $1.0 million and $1.5 million. During the fourth quarter of 2017, the Company recorded $1.3 million
in tax benefit based on the Company's preliminary analysis of the impact of the Tax Act. The Company's preliminary
estimate of the impact of the Tax Act is based on currently available information and interpretation of its provisions.
The actual results may differ from the current estimate due to, among other things, further guidance that may be
issued by U.S. tax authorities or regulatory bodies and/or changes in interpretations and assumptions that the
Company has preliminarily made. The Company's evaluation of the impact of the Tax Act is subject to refinement for
up to one year after enactment
Note 9. Time Deposits and Related Party Deposits
At December 31, 2017, the scheduled maturities of time deposits were as follows:
($ in thousands)
2018
2019
2020
2021
2022
Thereafter
$ 638,942
146,363
45,725
27,710
23,689
4,306
$ 886,735
124
Deposits received from executive officers and directors and their associates totaled approximately $3,829,000 and
$3,030,000 at December 31, 2017 and 2016, 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, 2017 and 2016, the Company held $405.1 million and $276.4 million, respectively, in time
deposits of $250,000 or more (which is the current FDIC insurance limit for insured deposits as of December 31,
2017). Included in these deposits were brokered deposits of $234.0 million and $133.4 million at December 31, 2017
and 2016, respectively.
Note 10. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31, 2017 and
2016:
Description – 2017
Due date
Call Feature
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Term Note
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
Trust Preferred Securities
1/05/2018
1/29/2018
4/18/2018
6/26/2018
9/28/2018
12/24/2018
5/29/2020
7/24/2023
12/22/2023
1/15/2026
6/26/2028
7/17/2028
8/18/2028
8/22/2028
12/20/2028
1/23/2034
Trust Preferred Securities
6/15/2036
Trust Preferred Securities
1/07/2035
None
None
None
None
None
None
None
None
None
None
None
None
None
None
None
Quarterly by Company
beginning 1/23/2009
Quarterly by Company
beginning 6/15/2011
Quarterly by Company
beginning 1/7/2010
Total borrowings / weighted average rate as of December 31, 2017
Unamortized discount on acquired borrowings
Total borrowings
2017
Amount
$ 135,000,000
68,000,000
50,000,000
20,000,000
10,000,000
20,000,000
40,000,000
250,000
1,100,000
8,500,000
264,000
66,000
195,000
195,000
391,000
20,620,000
25,774,000
10,310,000
$ 410,665,000
(3,122,000)
$ 407,543,000
Interest Rate
1.36% fixed
1.41% fixed
1.25% fixed
1.67% fixed
1.52% fixed
1.57% fixed
1.62% fixed
1.00% fixed
1.25% fixed
1.98% fixed
0.25% fixed
0.00% fixed
1.00% fixed
1.00% fixed
1.50% fixed
4.08% at 12/31/2017
adjustable rate
3 month LIBOR + 2.70%
2.98% at 12/31/2017
adjustable rate
3 month LIBOR + 1.39%
3.36% at 12/31/2017
adjustable rate
3 month LIBOR + 2.00%
1.72%
125
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
1/27/2017
1/30/2017
4/18/2017
12/26/2017
12/29/2017
12/24/2018
1/23/2034
None
None
None
None
None
None
Quarterly by Company
beginning 1/23/2009
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
6/15/2036
Quarterly by Company
beginning 6/15/2011
25,774,000
Interest Rate
0.61% fixed
0.63% fixed
0.70% fixed
1.19% fixed
0.80% fixed
1.57% fixed
3.59% at 12/31/2016
adjustable rate
3 month LIBOR + 2.70%
2.35% at 12/31/2016
adjustable rate
3 month LIBOR + 1.39%
Total borrowings / weighted average rate as of December 31, 2016
$ 271,394,000
1.16%
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 became callable by the Company at par on any
quarterly interest payment date beginning on January 23, 2009. The interest rate on these debt securities adjusts on
a quarterly basis at a rate of three-month LIBOR plus 2.70%.
In the above tables, the $25.8 million in borrowings due on June 15, 2036 relate to borrowings structured as trust
preferred capital securities that were issued by First Bancorp Capital Trust IV, an unconsolidated subsidiary of the
Company, on April 13, 2006 and qualify as capital for regulatory capital adequacy requirements. These unsecured
debt securities became callable by the Company at par on any quarterly interest payment date beginning on June 15,
2011. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus
1.39%.
In the above table for 2017, the $10.3 million in borrowings due on January 7, 2035 relate to borrowings structured as
trust preferred capital securities that were issued by Carolina Capital Trust, an unconsolidated subsidiary of the
Company. The Company acquired Carolina Bank Holdings, Inc. and its subsidiary, Carolina Capital Trust, on March 3,
2017. These unsecured debt securities qualify as capital for regulatory capital adequacy requirements and became
callable by the Company at par on any quarterly interest payment date beginning on January 7, 2010. The interest
rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.00%.
At December 31, 2017, the Company had three sources of readily available borrowing capacity – 1) an approximately
$936 million line of credit with the FHLB, of which $354 million was outstanding at December 31, 2017 and $225
million was outstanding at December 31, 2016, 2) a $35 million federal funds line of credit with a correspondent bank,
of which none was outstanding at December 31, 2017 or 2016, and 3) an approximately $109 million line of credit
through the Federal Reserve Bank of Richmond’s (FRB) discount window, of which none was outstanding at December
31, 2017 or 2016.
The Company’s line of credit with the FHLB totaling approximately $936 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 $198
million at December 31, 2017 and $193 million at December 31, 2016, 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 $384
million at December 31, 2017.
126
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, 2017 or 2016.
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, 2017, the available line of credit was approximately $109 million. The Company had no
borrowings outstanding under this line of credit at December 31, 2017 or 2016.
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 $2.3 million in 2017, $1.5 million in 2016, and $1.2 million in 2015.
Future obligations for minimum rentals under noncancelable operating leases at December 31, 2017 are as follows:
($ in thousands)
Year ending December 31:
2018
2019
2020
2021
2022
Thereafter
Total
$ 1,692
1,524
1,182
975
767
4,390
$ 10,530
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. For the years presented, the Company contributed
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%. The Company’s matching contribution expense was $2.3 million, $1.6 million
and $1.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. Effective January 1, 2018, the
Company’s matching contribution was increased to 100% of the employee’s salary contribution up to 6%. Although
discretionary contributions by the Company are permitted by the plan, the Company did not make any such
contributions in 2017, 2016 or 2015. 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. In December 2017, the Company’s Retirement Committee approved a resolution to terminate the
Pension Plan effective April 1, 2018.
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
127
provide for benefits under the Pension Plan. The Company did not make any contributions to the Pension Plan in
2017, 2016 or 2015. If needed, the Company expects to contribute an amount sufficient to fully fund the Plan at the
time of the expected liquidation in 2018.
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
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
2017
2016
2015
$ 36,840
−
1,449
1,941
(2,080)
38,150
36,950
6,436
−
(2,080)
41,306
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
Funded status at end of year
$ 3,156
110
(675)
The accumulated benefit obligation related to the Pension Plan was $38,150,000, $36,840,000, and $36,164,000 at
December 31, 2017, 2016, and 2015, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets at
December 31, 2017 and 2016 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands)
Other assets
Other liabilities
2017
$ 3,156
−
$ 3,156
2016
110
−
110
The following table presents information regarding the amounts recognized in accumulated other comprehensive
income (“AOCI”) at December 31, 2017 and 2016, as it relates to the Pension Plan.
($ in thousands)
2017
2016
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
Net amount recognized as increase (decrease) to AOCI
$ (3,925)
−
(3,925)
1,452
$ (2,473)
(5,856)
−
(5,856)
2,164
(3,692)
128
The following table reconciles the beginning and ending balances of AOCI at December 31, 2017 and 2016, as it
relates to the Pension Plan:
($ in thousands)
2017
2016
Accumulated other comprehensive loss at beginning of fiscal year
Net gain (loss) arising during period
Amortization of unrecognized actuarial loss
Tax (expense) benefit of changes during the year, net
Accumulated other comprehensive gain (loss)
Reclassification from AOCI to Retained Earnings due to statutory tax changes
Accumulated other comprehensive gain (loss) at end of fiscal year
$ (3,692)
1,686
244
(711)
(2,473)
(436)
$ (2,909)
(3,466)
(412)
238
(52)
(3,692)
−
(3,692)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension
Plan:
($ in thousands)
2017
2016
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
$ 5,965
1,117
̶
$ 7,082
5,007
958
̶
5,965
Net pension (income) cost for the Pension Plan included the following components for the years ended December 31,
2017, 2016, and 2015:
($ in thousands)
2017
2016
2015
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
$ ̶
1,449
(2,810)
244
$ (1,117)
̶
1,502
(2,698)
238
(958)
̶
1,364
(2,847)
̶
(1,483)
The following table is an estimate of the benefits that will be paid in accordance with the Pension Plan during the
indicated time periods, assuming the Pension Plan is operated on an ongoing basis. As previously noted, the
Company intends to terminate and liquidate the Pension Plan in 2018, which would result in the settlement of all
benefits.
($ in thousands)
Year ending December 31, 2018
Year ending December 31, 2019
Year ending December 31, 2020
Year ending December 31, 2021
Year ending December 31, 2022
Years ending December 31, 2023-2027
Estimated
benefit
payments
$ 1,539
1,711
1,764
1,867
1,910
10,039
For each of the years ended December 31, 2017, 2016, and 2015, 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.
In December 2017, as a result of the Company’s intent to terminate and liquidate the Pension Plan, the Pension Plan’s
assets were all shifted into a money market fund.
129
Prior to the re-allocation of the Funds in the Pension Plan in December 2017, the Funds were invested in a mix of
investment types in accordance with the Pension Plan’s investment policy, which was intended to provide an average
annual rate of return of 7% to 10%, while maintaining proper diversification.
The fair values of the Company’s pension plan assets at December 31, 2017, by asset category, are as follows:
($ in thousands)
Total Fair Value at
December 31,
2017
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
Total
$ 41,306
$ 41,306
−
−
41,306
41,306
−
−
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 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, 2017 and 2016.
- 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 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.
130
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
Projected benefit obligation at end of year
Plan assets
Funded status at end of year
2017
2016
2015
$ 5,910
118
227
85
(370)
5,970
─
$ (5,970)
5,778
106
238
145
(357)
5,910
─
(5,910)
5,216
201
206
497
(342)
5,778
─
(5,778)
The accumulated benefit obligation related to the SERP was $5,970,000, $5,910,000, and $5,778,000 at December 31,
2017, 2016, and 2015, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets at
December 31, 2017 and 2016 as it relates to the SERP, excluding the related deferred tax assets.
($ in thousands)
Other assets – prepaid pension asset (liability)
Other assets (liabilities)
2017
2016
$ (6,695)
725
$ (5,970)
(6,754)
844
(5,910)
The following table presents information regarding the amounts recognized in AOCI at December 31, 2017 and 2016,
as it relates to the SERP:
($ in thousands)
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
2017
2016
$ 725
−
725
(268)
844
−
844
(311)
Net amount recognized as increase (decrease) to AOCI
$ 457
533
The following table reconciles the beginning and ending balances of AOCI at December 31, 2017 and 2016, as it
relates to the SERP:
($ in thousands)
2017
2016
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
$ 533
(85)
−
(34)
−
43
$ 457
625
(145)
−
(35)
−
88
533
131
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the SERP:
($ in thousands)
2017
2016
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
$ (6,754)
(311)
370
$ (6,695)
(6,802)
(309)
357
(6,754)
Net pension cost for the SERP included the following components for the years ended December 31, 2017, 2016, and
2015:
($ in thousands)
2017
2016
2015
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
$ 118
227
(34)
$ 311
106
238
(35)
309
201
206
(79)
328
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, 2018
Year ending December 31, 2019
Year ending December 31, 2020
Year ending December 31, 2021
Year ending December 31, 2022
Years ending December 31, 2023-2027
Estimated
benefit
payments
$ 414
411
408
420
415
2,041
The following assumptions were used in determining the actuarial information for the Pension Plan and the SERP for
the years ended December 31, 2017, 2016, and 2015:
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
2017
2016
2015
Pension
Plan
3.97%
3.46%
7.75%
n/a
SERP
3.97%
3.46%
n/a
n/a
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
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.
132
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, 2017.
($ 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
$ 225
144
$ 369
Variable Rate
456
513
969
Total
681
657
1,338
At December 31, 2017 and 2016, the Company had $15.2 million and $12.7 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 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, Henderson, Hoke, Iredell, Lee, Madison, McDowell, Mecklenburg, Montgomery,
Moore, New Hanover, Onslow, Pitt, Randolph, Richmond, Robeson, Rockingham, Rowan, Scotland, Stanly,
Transylvania 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.
133
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, 2017 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
Ginnie Mae – mortgage-backed securities
Small Business Administration securities
Federal Home Loan Bank of Atlanta - common stock
Federal Reserve Bank - common stock
Bank of America corporate bonds
Federal Home Loan Bank System - bonds
Citigroup, Inc. corporate bonds
North Carolina State municipal bonds
Goldman Sachs Group Inc. corporate bond
JP Morgan Chase corporate bond
Fannie Mae – bond
Financial Institutions, Inc. corporate bond
Spartanburg, South Carolina Sanitary Sewer District municipal bonds
Craven County, North Carolina municipal bonds
Wells Fargo & Company corporate bond
Eagle Bancorp corporate bond
Freddie Mac – bond
South Carolina State municipal bonds
Cary, North Carolina municipal bonds
Virginia State Housing Authority municipal bond
Amortized Cost
$ 154,606
107,712
63,812
34,821
19,647
11,691
7,000
6,500
6,035
5,589
5,090
5,022
5,000
4,000
3,851
3,532
3,096
2,549
2,500
2,179
2,023
2,003
Fair Value
153,561
106,722
63,030
34,378
19,647
11,691
7,153
6,440
6,096
5,608
5,132
5,075
4,945
4,175
3,982
3,623
3,124
2,500
2,482
2,312
2,049
2,010
The Company primarily 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, 2017, the
Company had deposits in the Federal Home Loan Bank of Atlanta totaling $3.8 million, deposits of $368.4 million in
the Federal Reserve Bank, deposits of $0.1 million in PCBB, and deposits of $55.4 million in Bank of America. 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 PCBB and
Bank of America are FDIC-insured up to $250,000.
Note 14. Fair Value of Financial Instruments
Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes
three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
134
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring
and nonrecurring basis at December 31, 2017.
($ in thousands)
Description of Financial Instruments
Recurring
Securities available for sale:
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
Total available for sale securities
Nonrecurring
Impaired loans
Foreclosed real estate
Fair Value at
December 31,
2017
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level
2)
Significant
Unobservable
Inputs
(Level 3)
$ 13,867
295,213
34,190
$ 343,270
$ 14,086
12,571
—
—
—
—
—
—
13,867
295,213
34,190
343,270
—
—
—
—
—
—
14,086
12,571
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 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,
commercial mortgage-backed obligations, government-sponsored enterprise securities, and corporate bonds.
In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the
hierarchy.
The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair
value determination is consistent with the applicable accounting guidance and that the investments are
properly classified in the fair value hierarchy. Further, the Company validates the fair values for a sample of
135
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, 2017,
the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description
Impaired loans
Fair Value at
December 31,
2017
$ 14,086
Foreclosed real estate
12,571
Valuation
Technique
Appraised value;
PV of expected
cash flows
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%
136
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
Fair Value at
December 31,
2016
$ 12,284
Foreclosed real estate
9,532
Valuation
Technique
Appraised value;
PV of expected
cash flows
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, 2017 or 2016.
For the year ended December 31, 2017, the increase in the fair value of securities available for sale was $639,000, and
for the year ended December 31, 2016, the decrease in the fair value of securities available for sale was $1,919,000,
which is included in other comprehensive income (net of tax expense of $234,000 and tax benefit of $683,000, for
2017 and 2016, respectively). Fair value measurement methods at December 31, 2017 and 2016 are consistent with
those used in prior reporting periods.
As discussed in Note 1(r), the Company is required to disclose estimated fair values for its financial instruments. Fair
value estimates as of December 31, 2017 and 2016 and limitations thereon are set forth below for the Company’s
financial instruments. See Note 1(r) for a discussion of fair value methods and assumptions, as well as fair value
information for off-balance sheet financial instruments.
($ in thousands)
Cash and due from banks,
noninterest-bearing
Due from banks, interest-
bearing
Securities available for sale
Securities held to maturity
Presold mortgages in process
of settlement
Total loans, net of allowance
Accrued interest receivable
Bank-owned life insurance
Deposits
Borrowings
Accrued interest payable
December 31, 2017
December 31, 2016
Level in
Fair Value
Hierarchy
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
$ 114,301
114,301
71,645
71,645
Level 1
Level 2
Level 2
Level 1
Level 3
Level 1
Level 1
Level 2
Level 2
Level 2
375,189
343,270
118,503
12,459
4,019,071
14,094
99,162
4,406,955
407,543
1,235
375,189
343,270
118,998
12,459
4,010,551
14,094
99,162
4,401,757
397,903
1,235
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
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.
137
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 $1,095,000, $714,000 and $710,000 for the years
ended December 31, 2017, 2016, and 2015, respectively. Of the $1,095,000 in expense that was recorded in 2017,
approximately $320,000 related to the June 1, 2017 director grants discussed below, and is classified as “other
operating expenses” in the Consolidated Statements of Income. The remaining $775,000 in expense relates to the
employee grants discussed below and is recorded as “salaries expense.” Stock based compensation is reflected as an
adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows. The
Company recognized $405,000, $264,000, and $277,000 of income tax benefits related to stock based compensation
expense in the income statement for the years ended December 31, 2017, 2016, and 2015, respectively.
At December 31, 2017, 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, 2017, the First Bancorp 2014 Equity Plan was the only plan that had shares available for
future grants, and there were 809,690 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.
The Company typically grants shares of common stock to each non-employee director in June of each year. On June
1, 2017, the Company granted 11,190 shares of common stock to non-employee directors (1,119 shares per director),
at a fair market value of $28.59 per share, which was the closing price of the Company’s common stock on that date,
which resulted in $320,000 in expense. On June 1, 2016, the Company granted 6,584 shares of common stock to non-
employee directors (823 shares per director), at a fair market value of $19.56 per share, which was the closing price
of the Company’s common stock on that date, which resulted in $129,000 in expense.
The Company’s senior officers 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. In the last three years, a total
138
of 55,648 shares of restricted stock have been granted related to performance in the preceding fiscal years. Total
compensation expense associated with those grants was $758,000 and is being recognized over the respective vesting
periods. The Company recorded $282,000, $220,000 and $93,000, for the years ended December 31, 2017, 2016 and
2015, respectively.
In the last three years, the Compensation Committee of the Company’s Board of Directors also granted 130,059
shares of stock to various employees of the Company to promote retention. The total value associated with these
grants amounted to $2.8 million, and is being recorded as expense over their three year vesting periods. For 2017,
2016, and 2015, total compensation expense related to these grants was $491,000, $366,000, and $488,000,
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
$733,000 in stock-based compensation expense in 2018.
The following table presents information regarding the activity during 2015, 2016, and 2017 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, 2015
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
Granted during the period
Vested during the period
Forfeited or expired during the period
48,322
(28,275)
(8,535)
31.05
20.05
18.34
Nonvested at December 31, 2017
103,302
$ 24.09
In years prior to 2009, stock options were the primary form of equity grant utilized by the Company. The stock
options had a term of 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, 2017, there were 38,689 stock options outstanding related to the two First Bancorp plans, with
exercise prices ranging from $14.35 to $16.81.
139
The following table presents information regarding the activity since January 1, 2015 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, 2015
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
Balance at December 31, 2016
59,948
$ 17.18
Granted
Exercised
Forfeited
Expired
−
(21,259)
−
−
−
19.16
−
−
$ 19,843
$ 81,894
$ 236,584
Outstanding at December 31, 2017
38,689
$ 16.09
0.67
$ 743,679
Exercisable at December 31, 2017
38,689
$ 16.09
0.67
$ 743,679
In 2017, 2016 and 2015, the Company received $287,000, $375,000 and $112,000, respectively, as a result of stock
option exercises.
The following table summarizes information about the stock options outstanding at December 31, 2017:
Range of
Exercise Prices
$13.27 to $15.48
$15.48 to $17.70
Options Outstanding
Weighted-
Average
Remaining
Contractual Life
Number
Outstanding
at 12/31/17
9,000
29,689
38,689
1.4
0.4
0.7
Weighted-
Average
Exercise
Price
$ 14.35
16.61
$ 16.09
Options Exercisable
Number
Exercisable
at 12/31/17
Weighted-
Average
Exercise
Price
9,000
29,689
38,689
$ 14.35
16.61
$ 16.09
Note 16. Regulatory Restrictions
The Company is regulated by the Board of Governors of the Federal Reserve System (“FRB”) and is subject to
securities registration and public reporting regulations of the Securities and Exchange Commission. The Bank is
regulated by the FRB and the North Carolina Commissioner of Banks.
The primary source of funds for the payment of dividends by the Company is dividends received from its subsidiary,
the Bank. The Bank, as a North Carolina banking corporation, may declare dividends so long as such dividends do not
reduce its capital below its applicable required capital (typically, the level of capital required to be deemed
140
“adequately capitalized.”) As of December 31, 2017, approximately $580,000,000 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 FRB was approximately
$9,924,000 for the year ended December 31, 2017.
The Company and the Bank must comply with regulatory capital requirements established by the FRB. 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.
In 2013, the FRB 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 was 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. The capital conservation buffer requirement at December 31,
2017 was 1.25%.
As of December 31, 2017, 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 FRB and FDIC regulations.
In addition to the risk-based capital requirements described above, the Company and the Bank are subject to a
leverage capital requirement, which calls for a minimum ratio of Tier I capital (as defined above) to quarterly average
total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators.
The FRB 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, 2017 and 2016 in
the following table. Based on the most recent notification from its regulators, the Bank is well capitalized under the
framework. There are no conditions or events since that notification that management believes have changed the
Company’s classification.
Also see Note 19 for discussion of preferred stock transactions that have affected the Company’s capital ratios.
141
($ in thousands)
As of December 31, 2017
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, 2016
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)
$ 456,826
507,496
10.72%
11.91%
$ 298,406
298,277
7.00%
7.00%
$ N/A
276,972
532,907
531,612
508,791
507,496
508,791
507,496
12.50%
12.48%
11.94%
11.91%
9.58%
9.57%
447,609
447,416
10.50%
10.50%
N/A
426,111
362,350
362,194
212,536
212,224
8.50%
8.50%
4.00%
4.00%
N/A
340,889
N/A
265,281
$ 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%
12.49%
12.40%
10.17%
10.10%
296,952
296,787
10.50%
10.50%
N/A
282,654
240,390
240,256
138,981
138,908
8.50%
8.50%
4.00%
4.00%
N/A
226,124
N/A
173,634
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%
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, 2017, 2016, and 2015 are as follows:
($ in thousands)
2017
2016
2015
Other service charges, commissions, and fees – debit card interchange income
Other service charges, commissions, and fees – other interchange income
Other operating expenses – data processing expense
Other operating expenses – credit/debit card processing expense
Other operating expenses – marketing
Other operating expenses – outside consultants
Other operating expenses – telephone and data line expense
Other operating expenses – stationery and supplies
Other operating expenses – FDIC insurance expense
Other operating expenses – dues and subscriptions
Other operating expenses – repossession and collection
Other operating expenses – legal and audit
$ 7,732
3,722
2,910
2,797
2,549
2,511
2,470
2,399
2,350
1,889
1,736
1,497
6,564
3,018
6,433
2,288
2,010
2,296
1,999
1,700
2,311
2,066
2,009
1,604
1,842
1,408
1,935
2,181
1,674
1,677
2,133
2,039
2,394
1,710
2,167
1,689
142
Note 18. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS
($ in thousands)
Assets
Cash on deposit with bank subsidiary
Investment in wholly-owned subsidiaries, at equity
Premises and Equipment
Other assets
Total assets
Liabilities and shareholders’ equity
Trust preferred securities
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
As of December 31,
2017
2016
$ 4,535
745,669
7
−
$ 750,211
$ 53,758
3,474
57,232
692,979
$ 750,211
4,530
410,261
7
1,659
416,457
46,394
1,962
48,356
368,101
416,457
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31,
2017
2016
2015
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
$ 52,732
(4,793)
(1,867)
(100)
45,972
−
9,000
20,517
(1,216)
(792)
27,509
(175)
72,500
(43,328)
(1,032)
(1,106)
27,034
(603)
Net income available to common shareholders
$ 45,972
27,334
26,431
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
2017
Year Ended December 31,
2016
2015
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
Investing Activities:
Downstream cash investment to subsidiary
Note receivable proceeds received
Proceeds from sales of investments
Net cash paid in acquisitions
Total - investing 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
$ 45,972
27,509
27,034
4,793
283
(67)
50,981
(9,000)
3,054
174
(37,664)
(43,436)
(20,517)
15
130
7,137
−
−
−
−
43,328
1
(272)
70,091
−
−
−
−
(7,596)
−
287
(231)
(7,540)
5
4,530
$ 4,535
(6,632)
−
375
(166)
(6,423)
714
3,816
4,530
(7,105)
(63,500)
112
(54)
(70,547)
(456)
4,272
3,816
143
Note 19. Preferred Stock
Small Business Lending Fund
On September 1, 2011, the Company completed the sale of $63.5 million of Series B Preferred Stock to the Secretary
of the Treasury under the Small Business Lending Fund (“SBLF”). The fund was established under the Small Business
Jobs Act of 2010 that was created to encourage lending to small businesses by providing capital to qualified
community banks with assets less than $10 billion.
Under the terms of the stock purchase agreement, the Treasury received 63,500 shares of non-cumulative perpetual
preferred stock with a liquidation value of $1,000 per share, in exchange for $63.5 million. 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, the Company accrued approximately $370,000 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.
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 and $233,000 in preferred dividend payments for the Series C Preferred Stock during
2016 and 2015, respectively.
Note 20. Subsequent Event
In February 2018, the Company received loan recoveries totaling $2.7 million on two loans that had been previously
charged-off. Including those recoveries, the Company has recorded $3.3 million in total net recoveries from January
1, 2018 through February 28, 2018.
144
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of First Bancorp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of First Bancorp and its subsidiaries (the “Company”)
as of December 31, 2017 and 2016, 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, 2017, and the related
notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and
2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, 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 1, 2018 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Elliott Davis, PLLC
We have served as the Company’s auditor since 2005.
Charlotte, North Carolina
March 1, 2018
145
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of First Bancorp
Opinion on the Internal Control Over Financial Reporting
We have audited First Bancorp and subsidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2017 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”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017 based
on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016 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, 2017 and our report dated March 1, 2018 expressed an unqualified opinion.
As described in Management’s Report On Internal Control Over Financial Reporting, management has excluded ASB
Bancorp, Inc. (“Asheville Savings Bank”) from its assessment of internal control over financial reporting as of December
31, 2017, because it was acquired by the Company in a purchase business combination in the fourth quarter of 2017.
We have also excluded Asheville Savings Bank from our audit of internal control over financial reporting. Asheville
Savings Bank constituted approximately 4 percent of total consolidated revenue (interest income and noninterest
income) for the year ended December 31, 2017 and 14 percent of total consolidated assets as of December 31, 2017.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s
Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
146
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Elliott Davis, PLLC
Charlotte, North Carolina
March 1, 2018
147
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). The scope of management’s assessment of internal control over
financial reporting as of December 31, 2017 has excluded the operations of ASB Bancorp, Inc., which was acquired
during the fourth quarter of 2017. Based on Management’s 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, 2017.
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.
Elliott Davis, PLLC, an independent, registered public accounting firm, has audited the Company’s consolidated
financial statements as of and for the year ended December 31, 2017, and audited the Company’s effectiveness of
internal control over financial reporting as of December 31, 2017, as stated in their report, which is included in Item 8
hereof.
148
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 2017 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.
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
149
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.a
2.b
2.c
2.d
3.a
Purchase and Assumption Agreement dated as of March 3, 2016 between First Bank (as Seller) and First
Community Bank (as Purchaser) was filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
on March 7, 2016, and is incorporated herein by reference.
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.
Merger Agreement between First Bancorp and ASB Bancorp, Inc. dated May 1, 2017 was filed as Exhibit 2.1
to the Company’s Current Report on Form 8-K filed on May 1, 2017, and is incorporated herein by reference.
Articles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through 3.a.v
to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and
are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as
Exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and are
incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as
Exhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010 (Commission File
No. 333-167856), and are incorporated herein by reference. Articles of Amendment to the Articles of
Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6,
2011, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were
filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are
incorporated herein by reference.
3.b
Amended and Restated Bylaws of the Company were filed as Exhibit 3.1 to the Company's Current Report on
Form 8-K filed on February 9, 2018, and are incorporated herein by reference.
4.a
Form of Common Stock Certificate was filed as Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999, and is incorporated herein by reference.
10.a Form of Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit
10.a to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and is
incorporated herein by reference.
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 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.d
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. (*)
150
10.e
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.f
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.g 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.h
10.i
10.j
10.k
Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K was filed as Exhibit
10.1 to the Company’s Annual Report on Form 10-K for the year ended December 3,1 2016, as is
incorporated herein by reference. (*)
Form of Restricted Stock Award Agreement under the First Bancorp 2007 Equity Plan was filed as Exhibit 10.u
to the Company's Annual Report on Form 10-K for the year ended December 31, 2009, and is incorporated
herein by reference. (*)
First Bancorp Employees’ Pension Plan, including amendments, was filed as Exhibit 10.v to the Company's
Annual Report on Form 10-K for the year ended December 31, 2009, and is incorporated herein by reference.
(*)
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. Amendments to this agreement were filed in the Company’s
Current Reports on Form 8-K filed on March 9, 2017 and February 9, 2018 and are incorporated herein by
reference. (*)
10.l
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.m 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.n
10.o
10.p
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. (*)
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.
10.q
The Executive Nonqualified Excess Plan Document. (*)
10.r
The Executive Nonqualified Excess Plan Adoption Agreement dated January 30, 2017. (*)
151
10.s
The Executive Nonqualified Excess Plan Adoption Agreement dated February 26, 2018. (*)
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, 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, 2017, 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.
______________
(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.
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SIGNATURES
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 1st day of March 2018.
First Bancorp
By: /s/ Richard H. Moore
Richard H. Moore
Chief Executive Officer
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
March 1, 2018
Board of Directors
/s/ James C. Crawford, III
James C. Crawford, III
Chairman of the Board
Director
March 1, 2018
/s/ Donald H. Allred
Donald H. Allred
Director
March 1, 2018
/s/ Daniel T. Blue, Jr.
Daniel T. Blue, Jr.
Director
March 1, 2018
/s/ Mary Clara Capel
Mary Clara Capel
Director
March 1, 2018
/s/ Suzanne DeFerie
Suzanne DeFerie
Director
March 1, 2018
153
/s/ Eric P. Credle
Eric P. Credle
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
March 1, 2018
/s/ Michael G. Mayer
Michael G. Mayer
Director
March 1, 2018
/s/ Richard H. Moore
Richard H. Moore
Director
March 1, 2018
/s/ Thomas F. Phillips
Thomas F. Phillips
Director
March 1, 2018
/s/ O. Temple Sloan, III
O. Temple Sloan, III
Director
March 1, 2018
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
March 1, 2018
/s/ Abby J. Donnelly
Abby J. Donnelly
Director
March 1, 2018
/s/ John B. Gould
John B. Gould
Director
March 1, 2018
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
March 1, 2018
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
March 1, 2018
154