Our
STORY
2018 First Bancorp Annual Report
In every compelling story, there’s a
hero. There’s a challenge. And, there’s
the hero overcoming that challenge.
Those are the kind of stories we love, because they’re the kind
we help our customers write. And really, the kind we’ve been
You see, we knew we could build on our rich, 83-year heritage;
take the kind of loyalty we’ve earned in small towns and build
in the not-so-small ones right here in the Carolinas.
But what we lacked back then was a rallying
point, a way to really bring it all together.
Then we found it. It was right in front
of us all along.
Our
living ourselves.
ST
OR
At First Bank, we’re flipping the script. You’re the
It’s
you.
are our challenges. And we can’t wait to help you
that get us going.
It’s your dreams, your opportunities, your successes
hero. Just as your goals are our goals, your challenges
It’s you.
overcome them.
Should make for a great story, shouldn’t it?
Y
Let’s start writing it together. We’re ready.
In This Issue
2018—A Year in Review
First Bank Hurricane Response
Dream It. Do It. Campaign Finale
2018 Community Bank
of the Year
Asheville Savings Bank
Conversion Numbers
Focusing on Financial Wellness
Board of Directors
2018 Report
A Year in
Review
20
18
Dear Shareholders,
2017 that increased our total assets by nearly 50% and provided us
model, our earnings increased in 2018 by 94% to $89 million, while
efficiencies, and the continued success of our community banking
earnings per share increased 65% to $3.01 per share compared to
with increased market share in the North Carolina metro areas of
We entered 2018 after closing on two large bank acquisitions in
I am pleased to report on a remarkable year for our company.
Driven by solid balance sheet growth, increased operational
Customers and Friends,
$1.82 for 2017.
margin remaining stable at 4.12% compared to 4.08% in 2017. We
believe that striving for profitable growth is the most efficient use of
our shareholders’ capital.
Our earnings for 2018 were also favorably impacted by continued
improvement in asset quality. During the year, we received several
large recoveries on loans that we had written-off during the
great recession. These recoveries, along with overall continued
improvement in asset quality, were largely responsible for us
recording a negative provision for loan losses (income) of $3.6
million compared to a provision for loan losses of $0.7 million
recorded in 2017. Our ratio of nonperforming assets to total assets
of 0.74% at December 31, 2018 marked the seventh consecutive year
of improvement in that ratio.
Despite the favorable financial results for the year, our stock price
declined from $35.31 at December 31, 2017 to $32.66 on December
31, 2018. After generally rising for the first eight months of 2018
and reaching nearly $43 per share in August, our stock price was
negatively impacted late in the year by macro economic concerns
about the banking industry, which resulted in steep declines
for most bank stocks. However, our 2018 stock price decline of
7.5% compared favorably to most bank indices, which declined
approximately 18%-20% for the year.
In March 2018, we were pleased to report our first dividend increase
in many years, with the quarterly dividend rate increased from
$0.08 per share to $0.10 per share. And in February 2019, our Board
the Triad and Asheville. We worked hard in 2018 to fully integrate
of Directors declared another dividend rate increase, raising the
those acquisitions and to maximize operational efficiencies. Our
quarterly dividend rate to $0.12 per share. This 50% increase in
success in doing so resulted in our efficiency ratio, a common bank
dividends over the past two years has been popular with many
performance measure, improving from 61% in 2017 to 55% in 2018,
shareholders, and we are pleased that our increased profitability and
while our return on average assets improved from 1.00% in 2017 to
capital levels made it possible.
1.57% in 2018.
In 2018, our total loans increased by $207 million, or 5.1%, while our
taking every opportunity to renew our all-in commitment to our
total deposits grew by $252 million, or 5.7%. Importantly, we did
communities and customers. One of these initiatives was our “Dream
not sacrifice profitability to achieve this growth, with our net interest
It. Do It.” contest, which concluded in mid-2018. In this contest, we
As you will see throughout this Annual Report, First Bank is
5
First Bancorp
First Bank
Hurricane
R SE
PO
NSE
First Bank has donated more
than $100,000 to local charities
and in support of employees
impacted by the devastating
2018 hurricanes. First Bank also
set up a special SBA loan to
support business recovery.
donated $100,000 over a one-year period to worthwhile causes in our
communities based on more than 3,300 entries from folks across our
market area who explained how we could help make their dreams
come true. The stories were inspiring, and we were proud to play a
part in making a difference in many of our communities.
The theme for this Annual Report is “Our Story” which refers to the
stories of our customers and how we hope we can play a part in their
success. By focusing on excellence in everything we do, we believe
we can help make that success possible. Ongoing service excellence
training and initiatives take place in our company to further that goal.
And I’m pleased to report that our efforts are being recognized. In
November 2018, First Bank was named the 2018 Community Bank
of the Year at the North Carolina Rural Assembly. We were honored to
be chosen for this award which recognizes a financial institution
for providing loans and excellent customer services to small
businesses in North Carolina.
Due to acquisitions of many of our local competitors by large out-
of-state banks, we find our company as the only community bank
headquartered in North Carolina or South Carolina with total assets
between $4 billion and $14 billion. This puts us in the unique position
to be small enough to focus on individuals and small businesses in
our local markets, but big enough to be able to invest
in the latest technology and provide comprehensive financial
solutions for our customers. We look forward to continuing to
capitalize on this opportunity.
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
Chief Executive Officer
6
2018 Annual Report Dream It.
Do It.
C NO
TEST
When dreams come true,
communities grow stronger.
The “Dream It. Do It.” contest was
conceived to help deserving families
and individuals, demonstrate community
support, and to raise awareness of First
Bank and its full-service offerings. Now
that it is concluded, we can only declare
it a resounding success.
7
Final Facts
and Winners
3,300+entries from
all across the
Carolinas
500+
cities and towns
in North and South
Carolina
10lives changed
for the better!
First Bancorp Chase Clark
A Third Quarter Winner
Marianne Kernan
A Fourth Quarter Winner
Helping a Teen Help Others
Linden Lodge Foundation
“Our mission at Linden Lodge is to
provide those with a serious mental illness the
At eight, Chase Clark of Colfax, NC, started
opportunity, both mentally and physically, for the
a nonprofit and raised more than $6,000 for a
fulfilling life that we all desire,” says Marianne
local Make-A-Wish program. Now, at 13, Clark’s
Kernan, chairwoman of the Linden Lodge
nonprofit, Chase’s Chance, has many more
Foundation. This all-volunteer organization runs
beneficiaries for her fundraising. She’s helped
a judgment-free home, staffed 24 hours a day, for
financially disadvantaged classmates attend field
six residents to live, work, learn and prepare for
trips and summer camps; sent rain boots and
a return to a normal life. Besides the seven-
other shoes to Liberian schoolchildren who walk
bedroom, three-bath house, the seven-acre
to school year-round; regularly stocked supplies
property has a nursery, art and music therapy
for teachers at a Greensboro elementary school,
building, walking paths and room for peer support
delivered goodie-filled backpacks to kids in foster
meetings. Linden Lodge has been awarded $10,000,
care; funded microwaves for her school cafeteria to
which will be used to initiate construction of a small,
ensure everyone could prepare a hot meal within
standalone house for residents to engage in and
their lunch period; and sold more than 1,000 Girl
maintain physical wellness, an important part of
Scout cookies to help a local troop visit Disney
their treatment plan.
World this spring. Most of Clark’s $5,000 will fund
more nonprofit projects, with some saved for
college plus a small splurge–new shoes for her
coming track season. Says Chase’s mom Salina,
“Her influence at this age reminds us that we all can
bring change without excuses.”
Kernan has seen how lives can be transformed
when individuals are nurtured and taught to thrive,
and what a difference such a supportive community
can have on those with serious mental illness and
their families.
8
2018 Annual Report 2018
Community
Bank of the
YE
AR
9
Great news! First Bank was
honored as the 2018 Community
Bank of the Year at this year’s
North Carolina Rural Assembly,
held in Raleigh on November 15
and 16.
Hosted annually by the NC Rural Center, the Rural
Assembly is the state’s premier event focused on the
big issues facing North Carolina’s rural communities.
The award recognizes First Bank’s successful
participation in the Rural Center’s Loan Participation
Program, a program that reduces loan risk by
partnering with private lenders to fund small business
startup and expansion throughout the state. The
Community Bank of
the Year award is given
to a partner financial
institution that is a
leader in providing loan
capital and delivering
excellent customer
service to small
businesses in
North Carolina.
“We are truly
honored to be chosen
as Community Bank
of the Year,” said
Michael Mayer,
First Bank president
and CEO.
“We are truly honored to be chosen as
Community Bank of the Year,” said Michael
Mayer, First Bank president and CEO. “More
than ever, the success of small businesses is
crucial to the health of local and state-wide
economies. Working with the Rural Center
allows us to further support those towns and
communities and to help our clients achieve
their dreams.”
First Bancorp First Bank was recognized during the Rural Center’s
annual two-day convention, one of the state’s most
highly anticipated events. Bank representatives
accepted the award in front of a crowd of more
than 400 attendees.
“First Bank understands the vital role of the
community bank in supporting our state’s
economic wellbeing,” said Rural Center president
Patrick Woodie. “Institutions like First Bank are
often the first source of support for getting small
businesses off the ground, and the trusted partner
to help them grow. We are grateful to work with
partners like First Bank to help North Carolina’s
small business community.”
First Bank has
participated in
18 small business
loans, supporting
more than 340
jobs throughout
North Carolina.
As a leading
participant in the
Rural Center’s
Loan Participation
Program, First Bank
has participated in 18
small business loans,
supporting more than
340 jobs throughout North Carolina. Highlighted
at the event was First Bank client and loan program
participant Kimball Markham, owner of Markham
Metals, Inc., which operates the Asheboro
Recycling Center.
“With an approval from the NC Rural Center Loan
Participation Program combined with help from
Dawn Morton at First Bank, Asheboro Recycling
Center is moving forward with new projects,
equipment purchases and adding additional
labor,” said Markham. “I thank both First Bank and
the NC Rural Center for working together on the
right financial solutions that met our needs.”
Asheville
Savings Bank
Conversion
NUM ERSB
4,500
13branches added to First
calls fielded by Customer Service in
the first week, with topics ranging
from online banking sign up to new
tools and services customers now
have access to
Bank in Western North
Carolina on the morning
of Monday, March 19
3,490
man hours of training were conducted
over the months to get new team
members up to speed
110
associates joined
the First Bank team
12,000
of our new customers immediately
signed up for online and mobile
banking in the first two weeks
57,288
man hours were spent in meetings
discussing all the details
10
2018 Annual Report WELL
NESS
Launching Online Courses and
a New Money Management Tool
First Bank also wanted to encourage financial
wellness throughout its personal customer base
by offering access to a free suite of online courses to
help prepare customers for all of their goals—from
buying a home to paying for a wedding, picking their
first car to expanding their kitchen.
With the launch of MyMoney, First Bank’s money
management and budgeting tool, we now have tools
available so our customers can track their financial
health in real time and use that knowledge to plan
for a lifetime of joy.
Focusing
on Financial
@Work Gets a Facelift
In 2018, under the leadership of Bill Bunn,
EVP of Retail Banking, First Bank launched First@Work,
a revamp of a previous program.
Centered on financial wellness, delivering on our Promise
to Service Excellence, and deepening relationships with local
businesses, the new First@Work provides local employers
with a suite of accounts and tools to support the busy lives
of their employees, helping them with their long-term goals
and protecting what they’ve earned.
Since its launch in July 2018,
First Bank has supported nearly
250 employers throughout the
Carolinas with this program.
To see if it would be a good fit for
your business and your team, visit
localfirstbank.com/atwork.
11
First Bancorp Donald H. Allred
Daniel T. Blue, Jr.
Mary Clara Capel
James C. Crawford, III
Chairman First Bancorp
Suzanne DeFerie
Abby J. Donnelly
Board
of
R
DI
CT
E
ORS
Chip Gould
Michael G. Mayer
President First Bancorp
Richard H. Moore
CEO First Bancorp
Thomas F. Phillips
O. Temple Sloan, III
Fredrick L. Taylor, II
Virginia C. Thomasson
Dennis A. Wicker
12
2018 Annual Report 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
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
Net Interest Margin (tax-equivalent)
Return on average assets
Return on average common equity
Nonfinancial Data
Common shares outstanding
Number of branches
Number of employees
n/m = not meaningful.
2018
2017
Change 2017
to 2018
$ 207,430
(3,589)
61,834
159,375
24,189
89,289
$ 164,711
723
48,908
145,157
21,767
45,972
$ 3.02
3.01
0.40
$ 1.82
1.82
0.32
43.14
30.50
32.66
25.71
17.12
41.76
26.47
35.31
23.38
14.69
$ 5,864,116
4,249,064
4,659,339
764,230
$ 5,547,037
4,042,369
4,406,955
692,979
25.9%
n/m
26.4%
9.8%
11.1%
94.2%
65.9%
65.4%
25.0%
3.3%
15.2%
-7.5%
10.0%
16.5%
5.7%
5.1%
5.7%
10.3%
4.12%
1.57%
12.27%
4.08%
1.00%
8.62%
+ 4 bps
+ 57 bps
+ 365 bps
29,724,874
101
1,076
29,639,374
104
1,140
FIRST BANCORP
300 SW Broad Street, Southern Pines, NC 28387
localfirstbank.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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.
[X] YES [ ] 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 every Interactive Data File required to be submitted
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 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, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
[X] Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer
[ ] Smaller Reporting Company [ ] 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
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, 2018 as reported by The NASDAQ Global Select Market, was approximately $1,188,000,000.
1
The number of shares of the registrant’s Common Stock outstanding on February 28, 2019 was 29,723,682.
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 – 2018 Compared to 2017
Overview – 2017 Compared to 2016
Outlook for 2019
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, 2018 and 2017
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 2018
Consolidated Statements of Comprehensive Income for each of the years in the three-
year period ended December 31, 2018
Consolidated Statements of Shareholders’ Equity for each of the years in the
three-year period ended December 31, 2018
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 2018
3
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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
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*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s definitive
Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before April 30, 2019.
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, 2018, the Company had total consolidated assets of $5.9 billion, total loans of $4.2 billion, total
deposits of $4.7 billion, and shareholders’ equity of $0.8 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, 2018, we conducted
business from 101 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. Of the Bank’s 101 branches, 95 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, 2018 and the only one with total assets between $4 billion and $35 billion.
As of December 31, 2018, 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 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,”
“our,” or “us” in this annual report on Form 10-K shall mean collectively First Bancorp and its consolidated
subsidiaries.
5
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, 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 Federal Deposit
Insurance Corporation (“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 called FB Wealth Management Services.
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 specializes in providing consulting services for financial institutions across
the country related to SBA loan origination and servicing.
The Company is also the parent to a series of statutory business trusts organized for the purpose of issuing trust
preferred debt securities that qualify as regulatory capital. See additional discussion below in the section entitled
“Borrowings.”
6
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 2018, we served regions spread across North Carolina, with additional
operations in northeastern South Carolina. The following table presents, for each county where we operated as of
December 31, 2018, the number of bank branches operated by the Bank within the county, the approximate amount
of deposits with the Bank in the county as of December 31, 2018, our approximate deposit market share at June 30,
2018, and the number of bank competitors located in the county at June 30, 2018.
County
Alamance, 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
2
1
4
8
2
2
2
1
2
1
1
2
3
3
2
4
6
3
2
3
3
1
1
2
2
10
5
2
1
3
1
4
1
1
1
4
1
3
-
101
Deposits
(in millions)
$ 53
66
31
187
538
52
52
47
44
50
25
23
133
65
171
57
61
414
130
66
70
209
41
58
51
137
481
215
100
22
143
62
204
24
58
82
111
24
62
240
$ 4,659
Market
Share
2.5%
9.4%
10.2%
8.6%
10.3%
2.0%
3.8%
6.8%
10.7%
6.2%
0.6%
1.6%
5.0%
22.3%
21.1%
2.4%
0.2%
4.3%
12.8%
3.5%
2.4%
23.4%
41.2%
17.4%
0.0%
43.5%
35.7%
2.2%
6.8%
0.7%
9.4%
12.6%
18.8%
2.4%
4.1%
22.6%
11.2%
4.7%
0.2%
Number of
Competitors
15
7
4
11
16
11
8
9
6
5
14
8
10
4
6
12
15
17
9
12
19
9
1
5
24
2
9
19
10
14
11
5
8
10
13
6
6
6
31
Historically, our branches and facilities have been primarily located in small to medium-sized communities, whose
economies are based primarily on a variety of industries, including services and manufacturing. 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
7
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.
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 significantly enhanced by three strategic transactions
that we implemented in 2016 and 2017. See discussion below in the section entitled “Mergers and Acquisitions.”
We have three counties that hold significant shares of our deposit base. Buncombe County, the former headquarters
of one of our 2017 acquisitions (Asheville Savings Bank), holds 12% of our total deposit base. Moore County, the
headquarters of the Company, has total deposits comprising approximately 10% of our deposit base, while Guilford
County, the former headquarters of another 2017 acquisition (Carolina Bank), also holds 10% of our 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,
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 few years, 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 banks of all sizes attempting to
maximize yields on earning assets, the competition for high-quality loans remains intense. Accordingly, loan rates in
our markets continue to be under competitive pressure. Also, with the continued interest rate increases initiated by
the Board of Governors of the Federal Reserve System (“Federal Reserve”), the competitive pressure on increasing
rates on deposits has intensified. 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. Also, due to acquisitions of other
banks headquartered in North Carolina and South Carolina, we are the only bank headquartered in North Carolina
with total assets between $4 billion and $35 billion and the only bank headquartered in either state with total assets
8
between $4 billion and $14 billion. We believe that enhances several of our competitive advantages discussed above,
as well as provides scarcity value from an investor viewpoint.
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 $5,000,000 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 President and the Chief Credit Officer have joint authority to
approve loans up to $25,000,000. The Bank’s Board of Directors maintains loan authority in excess of the Bank’s in-
house limit, currently $25,000,000, and generally approves loans through its Executive Loan Committee. All lending
authorities are based on the borrower’s Total Credit Exposure (“TCE”), which is an aggregate of the Bank’s lending
relationship to the borrower. TCE is based on the borrower’s total credit exposure with the Bank either directly or
indirectly through loan guarantees or other borrowing entities related to the borrower through control or ownership.
The Executive Loan Committee reviews and approves loans that exceed the Bank’s in-house limit, loans to executive
officers, directors, and their affiliates and, in certain instances, other types of loans. New credit extensions are
reviewed daily by our senior management and the Credit Administration Department.
We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action.
Lending and credit administration officers and the board of directors meet periodically to review past due loans and
portfolio quality, while assuring that the Bank is appropriately meeting the credit needs of the communities 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 Bank’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 U.S. government and government-sponsored enterprises, mortgage-backed securities, state and municipal
obligations, public housing authority 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
9
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. On a quarterly basis, we review the financial statements for the
corporate bond issuers that we own for any signs of deterioration so that we can take timely action if deemed
necessary.
Our Chief Investment Officer implements the investment policy, monitors the investment portfolio, recommends
portfolio strategies and reports to the Company’s Investment Committee. The Investment Committee generally
meets on a quarterly basis to review investment activity and to assess the overall position of the securities portfolio.
The Investment Committee compares our securities portfolio with portfolios of other companies of comparable size.
In addition, reports of all purchases, sales, issuer calls, net profits or losses and market appreciation or depreciation of
the securities portfolio are reviewed by our Board of Directors. Once a quarter, our interest rate risk exposure is
evaluated by our Board of Directors. Each year, the written investment policy is approved by the board of directors.
Mergers and Acquisitions
As part of our operations, we have pursued an acquisition strategy over the years to augment our organic 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 a number of 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
10
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 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 Lending 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 our SBA Lending Division, please
visit www.firstbanksba.com. Information included on our Internet site is not incorporated by reference into this
annual report.
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 market expansion. This transaction, which was
completed in July 2016, resulted in our exit from western Virginia. The opportunity to assume what is essentially a
banking franchise in markets where we had recently invested in human capital was the primary factor we considered
in entering into the exchange agreement.
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 September 2017, we acquired Bear Insurance Services, an insurance agency based in Albemarle, North Carolina.
This acquisition provided us a larger platform for leveraging insurance services throughout our bank branch network
and more than doubled our insurance agency revenue.
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 market area.
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.
11
Employees
As of December 31, 2018, we had 1,054 full-time and 44 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 banking laws.
A bank holding company is required to file quarterly reports and other information regarding its business operations
and those of its subsidiaries with the Federal Reserve. It is also subject to examination by the Federal Reserve and is
required to obtain Federal Reserve approval prior to making certain acquisitions of other institutions or voting
securities. The Federal Reserve requires the Company to maintain certain levels of capital - see “Capital Resources
and Shareholders’ Equity” under Item 7 below. The Federal Reserve also has the authority to take enforcement
action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws,
regulations or conditions imposed in writing by the Federal Reserve. The Federal Reserve generally prohibits a bank
holding company from declaring or paying a cash dividend that would impose undue pressure on the capital of
subsidiary banks or would be funded only through borrowing or other arrangements which might adversely affect a
bank holding company’s financial position. Under the Federal Reserve policy, a bank holding company is not
permitted to continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully
fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset
quality and overall financial condition.
The Commissioner is empowered to regulate certain acquisitions of North Carolina banks and bank holding
companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules
necessary to effectuate the purposes of 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 U.S. 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
12
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.
FDIC Insurance
As a member of the FDIC, our deposits are insured up to applicable limits by the FDIC, and such insurance is backed by
the full faith and credit of the United States Government. The basic deposit insurance level is generally $250,000, as
specified in FDIC regulations. For this protection, each insured bank pays a quarterly statutory assessment and is
subject to the rules and regulations of the FDIC.
The FDIC insurance premium is based on an institution’s total assets minus its Tier 1 capital. An institution’s
premiums are determined based on its capital, supervisory ratings and other factors. Premium rates generally may
increase if the FDIC deposit insurance fund is strained due to the cost of bank failures and the number of troubled
banks. In addition, if the Bank experiences financial distress or operates in an unsafe or unsound manner, its deposit
premiums may increase.
We recognized approximately $2.3 million, $2.4 million, and $2.0 million in FDIC insurance expense in 2018, 2017, and
2016, respectively. In November 2018, the FDIC announced that the Deposit Insurance Fund (“DIF”) reserve ratio
exceeded the statutory minimum of 1.35% as of September 30, 2018. Among other things, this resulted in the FDIC
awarding assessment credits for banks with less than $10 billion in total assets that had contributed to the DIF in prior
years. We were notified in January 2019 that we had received $1.35 million in credits that could be used to offset
deposit insurance assessments in the future. When the DIF reaches 1.38%, the FDIC will begin to apply the Bank’s
credit against our quarterly deposit assessments. The DIF was 1.36% at December 31, 2018.
The FDIC may conduct examinations of and require reporting by FDIC-insured institutions. It may also prohibit an
institution from engaging in any activity that it determines by regulation or order to pose a serious risk to the deposit
insurance fund and may terminate the Bank’s deposit insurance if it determines that the institution has engaged in
unsafe or unsound practices or is in an unsafe or unsound condition.
Legislative and Regulatory Guidance and Developments
In addition to the regulations that are described above, new legislation is introduced from time to time in the U.S.
Congress that may affect our operations. In addition, the regulations governing the Company and the Bank may be
amended from time to time by the Federal Reserve, the FDIC, the Securities and Exchange Commission (the “SEC”), or
13
other agencies, as appropriate. Any legislative or regulatory changes, or changes to accounting standards, in the
future could adversely affect our operations and financial condition.
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.
While much of the original provisions of the Dodd-Frank Act were not directly applicable to us due to size thresholds,
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.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”),
was enacted to modify or remove certain financial reform rules and regulations, including some of those
implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure
established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository
institutions with assets less than $10 billion and for large banks with assets of more than $50 billion. Many of these
changes could result in meaningful regulatory changes for banks and their holding companies.
The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by
a financial institution and provides for an alternative capital rule for financial institutions and their holding companies
with total consolidated assets of less than $10 billion. The Economic Growth Act instructed the federal banking
regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10%, which has been proposed
to be 9% by the federal regulators. The Community Bank Leverage Ratio provides for a simpler calculation of a bank’s
capital ratio than the Basel III provisions currently in place (see below). Any qualifying depository institution or its
holding company that exceeds the Community Bank Leverage Ratio will be considered to have met generally
applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that
exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. In
addition, the Economic Growth Act includes regulatory relief for community banks of certain sizes regarding
regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures
and risk weights for certain high-risk commercial real estate loans. We continue to evaluate the impact that the rules
issued thus far under the Economic Growth Act will have on the bank, but we currently do not believe that it will be
significant. At this time, we do not expect to opt-in to the ability to utilize the Community Bank Leverage Ratio and
will instead continue to use the Basel III standards.
It is difficult at this time to predict when or how any new standards under the Economic Growth Act will ultimately be
applied to, or what specific impact the Economic Growth Act and the yet-to-be-written implementing rules and
regulations will have on us.
14
Regulatory Capital Requirement under Basel III
Effective January 1, 2015, the Company and the Bank became subject to new regulatory capital rules agreed to by the
Basel Committee on Banking Supervision in the accord referred to as “Basel III.” 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.
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
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 is being 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, effective as of January 1, 2019, the Company and the Bank are 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%.
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. First Bank is well-capitalized under all capital guidelines.
Current Expected Credit Loss Accounting Standard
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for
the Company on January 1, 2020. This standard, referred to as Current Expected Credit Loss (or “CECL”), requires
15
FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected
over the life of certain financial assets. CECL covers a broader range of assets than the current method of recognizing
credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, a banking
organization must record a one-time adjustment to its allowance for loan losses as of the beginning of the fiscal year
of adoption equal to the difference, if any, between the amount of credit loss allowances under the current
methodology and the amount required under CECL. For a banking organization, implementation of CECL is generally
likely to reduce retained earnings, and to affect other items, in a manner that reduces its regulatory capital. We
continue our ongoing analysis on the impact of this guidance on our consolidated financial statements. The amount
could change significantly as we continue to refine the data and estimates used in the model.
The Federal Reserve and the FDIC have adopted a rule that provides a banking organization the option to phase-in
over a three-year period the effects of CECL on its regulatory capital upon the adoption of the standard.
Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a
supervisory matter, without required formulaic measures. Liquidity risk management has become increasingly
important since the financial crisis. The Basel III liquidity framework requires banks and bank holding companies to
measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures
historically applied by banks and regulators for management and supervisory purposes, going forward would be
required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the
banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected
net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute
liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote
more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon.
These requirements will incent banking entities to increase their holdings of Treasury securities and other sovereign
debt as a component of assets and increase the use of long-term debt as a funding source.
In September 2014, the federal bank regulators approved final rules implementing the LCR for advanced approaches
banking organizations (i.e., banking organizations with $250 billion or more in total consolidated assets or $10 billion
or more in total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies
with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of
which would apply to the Company or the Bank. The federal bank regulators have not yet proposed rules to
implement the NSFR or addressed the scope of bank organizations to which it will apply.
Following the enactment of the Economic Growth Act in May 2018, the Federal Reserve stated that it would no longer
require bank holding companies with less than $100 billion in total consolidated assets to comply with the modified
version of the LCR. In addition, in October 2018, the federal bank regulators proposed to revise their liquidity
requirements so that banking organizations that are not global systematically important banks and have less than
$250 billion in total consolidated assets and less than $75 billion in each of off-balance sheet exposure, nonbank
assets, cross-jurisdictional activity and short-term wholesale funding would not be subject to any LCR or NSFR
requirements.
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
16
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.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our
operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people,
processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and
detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any
suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from
cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes
in defensive measures. While to date we have not detected a significant compromise, significant data loss or any
material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party
service providers are under constant threat and it is possible that we could experience a significant event in the
future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future
due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet
banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A.
Risk Factors for a further discussion of risks related to cybersecurity.
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 became
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
17
need to subject corporate borrowers to due diligence requests from financial institutions for certifications with
respect to their beneficial owners. Failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have
serious legal and reputational consequences for the institution, including causing applicable bank regulatory
authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such
transactions even if approval is not required.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries,
nationals and others which are administered by the U.S. Treasury Department Office of Foreign Assets Control
(“OFAC”). Failure to comply with these sanctions could have serious legal and reputational consequences, including
causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory
approval is required or to prohibit such transactions even if approval is not required.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit
needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository
institution is required to help meet the credit needs of its market areas by, among other things, providing credit to
low- and moderate- income individuals and communities. Depository institutions are periodically examined for
compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new
activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act,
each insured depository institution subsidiary of the financial holding company must have received a rating of at least
“satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA
ratings when considering a request for an approval of a proposed transaction. First Bank received a rating of
“satisfactory” in its most recent CRA examination. In April 2018, the U.S. Department of Treasury issued a
memorandum to the federal banking regulators with recommended changes to the CRA’s implementing regulations
to reduce their complexity and associated burden on banks. We will continue to evaluate the impact of any changes
to the regulations implementing the CRA.
Federal Securities Laws
The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). Therefore, the Company is subject to the reporting, information disclosure, proxy solicitation,
insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act. This
includes limits on sales of stock by certain insiders and the filing of insider ownership reports with the SEC. The SEC
and Nasdaq have adopted regulations under the Sarbanes-Oxley Act of 2002 and the Dodd Frank Act that apply to the
Company as a Nasdaq-traded, public company, which seek to improve corporate governance, provide enhanced
penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings.
Tax Cuts and Jobs Act
U.S. tax reform legislation was signed into law on December 22, 2017 and made broad and complex changes to the
U.S. Internal Revenue Code, including reducing the U.S. statutory tax rate from 35% to 21% beginning on January 1,
2018. With the adoption of this tax reform, our deferred tax balances were reduced as of December 31, 2017 to
reflect the new 21% statutory tax rate.
Beginning January 1, 2018, we applied the federal tax rate of 21% to our taxable earnings. Other provisions of U.S.
tax reform that we adopted on 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.
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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 SEC, 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 Exchange Act. These filings are available, free of charge, as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings can also
be accessed at the SEC’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.
Risks Related to Our Business
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.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information,
and adversely impact our reputation and results of operations.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized
access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent
threats, directed at the Company and/or its third party service providers. While we have experienced, and expect to
continue to experience, these types of threats and incidents, none of them to date have been material to the
Company. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats
(including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of
our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending
on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of
critical data and confidential or proprietary information (our own or that of third parties) and the disruption of
business operations. The potential consequences of a material cybersecurity incident include reputational damage,
litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could
materially adversely affect our results of operations.
Our allowance for loan losses may not be adequate to cover actual losses; we may need to materially increase our
allowance for loan losses under CECL.
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
20
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 FASB issued an Accounting Standards Update related to CECL, the new credit impairment 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 in the periods after
adoption.
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 Commissioner and the Federal Reserve. This
regulation and supervision is intended primarily to enhance the safe and sound operation of the Bank and 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.
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 FINCEN, 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 AML 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.
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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.
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 may make future acquisitions, which could dilute current shareholders’ stock ownership and expose us to
additional risks.
In accordance with our strategic plan, we evaluate opportunities to acquire other banks and branch locations to
expand the Company. As a result, we may engage in acquisitions and other transactions that could have a material
effect on our operating results and financial condition, including short and long-term liquidity. Our acquisition
activities could require us to issue a significant number of shares of common stock or other securities and/or to use a
substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection
with our potential future acquisitions were determined to be impaired, then we would be required to recognize a
charge against our earnings, which could materially and adversely affect our results of operations during the period in
which the impairment was recognized.
Our acquisition activities could involve a number of additional risks, some of which are described in more detail
elsewhere in this report and include:
·
·
·
·
·
the possibility that expected benefits may not materialize in the timeframe expected or at all, or may be
more costly to achieve;
incurring the time and expense associated with identifying and evaluating potential acquisitions and
merger partners and negotiating potential transactions, resulting in management’s attention being
diverted from the operation of our existing business;
using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks
with respect to the target institution or assets;
incurring the time and expense required to integrate the operations and personnel of the combined
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;
22
·
·
·
·
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 AML and
Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer protection laws, unfair,
deceptive, or abusive acts or practices regulations, or CRA reqirements, 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.
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 interest rate risk, which could negatively impact earnings.
Net interest income is the most significant component of our earnings. Our net interest income results from the
difference between the yields we earn on our interest-earning assets, primarily loans and investments, and the rates
that we pay on our interest-bearing liabilities, primarily deposits and borrowings. When interest rates change, the
yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities do not
necessarily move in tandem with each other because of the difference between their maturities and repricing
characteristics. This mismatch can negatively impact net interest income if the margin between yields earned and
rates paid narrows. Interest rate environment changes can occur at any time and are affected by many factors that
are outside our control, including inflation, recession, unemployment trends, the Federal Reserve’s monetary policy,
domestic and international disorder and instability in domestic and foreign financial markets.
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 involving millions of dollars 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
23
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.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity
demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our
securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise
funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on
our liquidity.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us
could be impaired by factors that affect us specifically, or the financial services industry or economy in general.
Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or
a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are
concentrated. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption
in the financial markets or negative views and expectations about the prospects for the financial services industry in
light of the recent turmoil faced by banking organizations or deterioration in credit markets.
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, 2018 of $234.4
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 $222.7 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.
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.
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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, 2018, we had 29,724,874 shares of common stock outstanding and had reserved for issuance 9,000
shares underlying options that are or may become exercisable at an average price of $14.35 per share. In addition, as
of December 31, 2018, we had the ability to issue 750,707 shares of common stock pursuant to options and restricted
stock under our existing equity compensation plans and 53,496 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.
We may be adversely impacted by the transition from LIBOR as a reference rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel
banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement
indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.
Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide
submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be
viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what
the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial
instruments.
We have a significant number of loans and borrowings with attributes that are either directly or indirectly dependent
on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Furthermore, failure to
adequately manage this transition process with our customers could adversely impact our reputation. Although we
are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately
manage the transition could have a material adverse effect on our business, financial condition and results of
operations.
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. 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 AML and Bank Secrecy Act compliance, fair lending laws, fair housing laws, consumer
protection laws, unfair, deceptive, or abusive acts or practices regulations, CRA 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.
25
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.
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, the Consumer
Finance Protection Bureau 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 CRA rating 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.
We could experience losses 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;
26
•
•
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely
affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and
results of operations.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of technology increases efficiency and enables
financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our
ability to address the needs of our customers by using technology to provide products and services that will satisfy
customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to
our customers. Failure to successfully keep pace with technological change affecting the financial services industry
could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
New lines of business or new products and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing lines
of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances
where the markets are not fully developed. In developing and marketing new lines of business and/or new products
and services, we may invest significant time and resources. Initial timetables for the introduction and development of
new lines of business and/or new products or services may not be achieved and price and profitability targets may
not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting
market preferences, may also impact the successful implementation of a new line of business and/or a new product
or service. Furthermore, any new line of business and/or new product or service could have a significant impact on
the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development
and implementation of new lines of business and/or new products or services could have a material adverse effect on
our business and, in turn, our financial condition and results of operations.
In May 2016, we completed the acquisition of SBA Complete. SBA Complete 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.
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
27
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.
Changes in accounting standards could materially impact our financial statements.
From time to time accounting standards setters change the financial accounting and reporting standards that govern
the preparation of our financial statements. These changes can be difficult to predict and can materially impact how
we record and report our financial condition and results of operations. In some cases, we could be required to apply a
new or revised standard retroactively, resulting in changes to previously reported financial results or a cumulative
charge to retained earnings. See Note 1(v) – Recent Accounting Pronouncements in the notes to consolidated
financial statements included in Item 8. Financial Statements.
Our business continuity plans or data security systems could prove to be inadequate, resulting in a material
interruption in, or disruption to, our business and a negative impact on our results of operations.
We rely heavily on communications and information systems to conduct our business. Our daily operations depend
on the operational effectiveness of our technology. We rely on our systems to accurately track and record our assets
and liabilities. Any failure, interruption or breach in security of our computer systems or outside technology, whether
due to severe weather, natural disasters, acts of war or terrorism, criminal activity, cyber attacks or other factors,
could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other
systems leading to inaccurate financial records. This could materially affect our business operations and financial
condition. While we have disaster recovery and other policies and procedures designed to prevent or limit the effect
of any failure, interruption or security breach of our information systems, there can be no assurance that any such
failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed.
The occurrence of any failures, interruptions or security breaches of our information systems could damage our
reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a material adverse effect on our results of
operations.
In addition, the Bank provides its customers the ability to bank online and through mobile banking. The secure
transmission of confidential information over the Internet is a critical element of online and mobile banking. While
we use qualified third party vendors to test and audit our network, our network could become vulnerable to
unauthorized access, computer viruses, phishing schemes and other security issues. The Bank may be required to
spend significant capital and other resources to alleviate problems caused by security breaches or computer viruses.
To the extent that the Bank’s activities or the activities of its customers involve the storage and transmission of
confidential information, security breaches and viruses could expose the Bank to claims, litigation, and other potential
liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose
confidence in the Bank’s systems and could adversely affect its reputation and its ability to generate deposits.
Additionally, we outsource the processing of our core data system, as well as other systems such as online banking, to
third party vendors. Prior to establishing an outsourcing relationship, and on an ongoing basis thereafter,
management monitors key vendor controls and procedures related to information technology, which includes
reviewing reports of service auditor’s examinations. If our third party provider encounters difficulties or if we have
difficulty in communicating with such third party, it will significantly affect our ability to adequately process and
account for customer transactions, which would significantly affect our business operations.
We rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with
applicable contractual arrangements or service level agreements. We maintain a system of policies and procedures
designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure,
(ii) changes in the vendor’s financial condition and (iii) changes in the vendor’s support for existing products and
28
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 a client, we may assume that
the 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.
Risks Related to the Company’s Common Stock
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 stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you
find attractive. Our stock price can fluctuate significantly in response to a variety of factors including the risk factors
discussed elsewhere in this report that are outside of our control and which may occur regardless of our operating
results.
29
An investment in the Company’s common stock is not an insured deposit.
The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other
deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is
inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to
the same market forces that affect the price of common stock in any company. As a result, if you acquire the
Company’s common stock, you could lose some or all of your investment.
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 primarily housed in two one-story steel frame buildings in Troy, North Carolina. Both
of these buildings are owned by the Bank. At December 31, 2018, the Company operated 101 bank branches. The
Company owned all of its bank branch premises except eight branch offices for which the land and buildings are
leased and nine branch offices for which the land is leased but the building is owned. The Bank also leases one loan
production office and five other office locations for administrative functions. The Bank also leases 10 locations for
our SBA related activities and leases three properties for our insurance subsidiary. 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.
30
PART II
Item 5. Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity
Securities
Our common stock trades on The NASDAQ Global Select Market under the trading symbol “FBNC”. Tables 1 and 22
included in “Management’s Discussion and Analysis” below provide historic information on the market price for the
Company’s common stock. As of December 31, 2018, there were approximately 1,700 shareholders of record and
another 7,100 shareholders whose stock is held in “street name.”
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the five-
year period commencing December 31, 2013 and ending December 31, 2018, with the cumulative total return of the
Russell 2000 Index (reflecting overall stock market performance of small-capitalization companies), an index of banks
with between $1 billion and $5 billion in assets, and an index of banks with between $5 billion and $10 billion in
assets, both as constructed by SNL Securities, LP (reflecting changes in banking industry stocks). In 2017, the
Company’s total assets increased above $5 billion due to acquisition transactions. The graph and table assume that
$100 was invested on December 31, 2013 in each of the Company’s common stock, the Russell 2000 Index, and the
SNL Bank Indexes, and that all dividends were reinvested.
31
First Bancorp
Comparison of Five-Year Total Return Performances (1)
Five Years Ending December 31, 2018
Total Return Performance
First Bancorp
Russell 2000 Index
SNL Bank $1B-$5B Index
SNL Bank $5B-$10B Index
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
First Bancorp
Russell 2000
SNL Index-Banks between $1
2013
$ 100.00
100.00
2014
113.12
104.89
Total Return Index Values (1)
December 31,
2015
116.87
100.26
2016
171.94
121.63
2017
225.92
139.44
2018
211.23
124.09
billion and $5 billion
100.00
104.56
117.04
168.38
179.51
157.27
SNL Index-Banks between $5
billion and $10 billion
100.00
103.01
117.34
168.11
167.48
151.57
_____________
(1) Total return indices were provided from an independent source, SNL Securities LP, Charlottesville, Virginia, and assume
initial investment of $100 on December 31, 2013, reinvestment of dividends, and changes in market values. Total
return index numerical values used in this example are for illustrative purposes only.
32
Issuer Purchases of Equity Securities
Pursuant to authorizations by the Company’s Board of Directors, the Company has from time to time repurchased
shares of common stock in private transactions and in open-market purchases. The Company did not repurchase any
shares of its common stock during the quarter ended December 31, 2018.
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,
2018 to October 31,
2018)
Month #2 (November 1,
2018 to November 30,
2018)
Month #3 (December 1,
2018 to December 31,
2018)
Total
___________________
(1) All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. As of December 31, 2018, the
Company had the authorization to repurchase up to 375,000 shares of the Company’s stock (per July 30, 2004 authorization). On
February 5, 2019, the Company announced that its Board of Directors had approved the authorization to repurchase up to $25,000,000
of the Company’s common stock, which replaces the share authorization noted above. The repurchase authorization has an expiration
date of December 31, 2019.
(2) The table above does not include shares that were used by option holders to satisfy the exercise price of the options issued by the
Company to its employees and directors pursuant to the Company’s stock option plans. There were no such transactions in the three
months ended December 31, 2018.
Also see “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 12.
Item 6. Selected Consolidated Financial Data
Table 1 on page 63 of this report sets forth the selected consolidated financial data for the Company.
33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis is intended to assist readers in understanding our results of operations and
changes in financial position for the past three years. This discussion should be read in conjunction with the
consolidated financial statements and accompanying notes beginning on page 81 of this report and the supplemental
financial data contained in Tables 1 through 22 beginning on page 68 of this report. This discussion may contain
forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from
those anticipated in forward-looking statements as a result of various factors. The following discussion is intended to
assist in understanding the financial condition and results of operations of the Company.
Overview - 2018 Compared to 2017
We reported net income per diluted common share of $3.01 in 2018, a 65.4% increase compared to 2017.
Financial Highlights
($ in thousands except per share data)
Earnings
Net interest income
Provision (reversal) for loan losses
Noninterest income
Noninterest expenses
Income before income taxes
Income tax expense
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
2018
2017
Change
$ 207,430
(3,589)
61,834
159,375
113,478
24,189
$ 89,289
164,711
723
48,908
145,157
67,739
21,767
45,972
25.9%
n/m
26.4%
9.8%
67.5%
11.1%
94.2%
$ 3.02
3.01
1.82
1.82
65.9%
65.4%
$ 5,864,116
4,249,064
4,659,339
5,547,037
4,042,369
4,406,955
5.7%
5.1%
5.7%
1.57%
12.27%
4.12%
1.00%
8.62%
4.08%
For the year ended December 31, 2018, we recorded net income available to common shareholders of $89.3 million,
or $3.01 per diluted common share, an increase of 65.4% in earnings per share from the $46.0 million, or $1.82 per
diluted common share, for 2017. The higher earnings in 2018 were primarily due to the acquisitions of Carolina Bank
on March 3, 2017 and Asheville Savings Bank on October 1, 2017. The assets, liabilities and earnings for the
acquisitions were recorded beginning on their respective acquisition dates. Therefore, the year 2018 includes twelve
months of earnings from the acquisition compared to only a partial year in 2017. Earnings and earnings per share for
2018 also benefitted from operational efficiencies that were realized in the integration of the acquisitions that
became fully realized in the final three quarters of 2018.
Net interest income for the year ended December 31, 2018 amounted to $207.4 million, a 25.9% increase from the
$164.7 million recorded in 2017. The increase in net interest income was due to a higher net interest margin realized
in 2018 as well growth in interest-earning assets, which for the twelve month period was impacted by assets acquired
in the Carolina Bank and Asheville Savings Bank acquisitions. Also, see the section entitled “Net Interest Income” for
additional information.
34
Our net interest margin (tax-equivalent net interest income divided by average earning assets) was 4.12% for 2018
compared to 4.08% for 2017. The increase in the net interest margin realized in 2018 were a result of asset yields
increasing slightly more than liability costs. Interest income for the year ended December 31, 2018 was also positively
impacted by approximately $0.8 million in interest recoveries received in the first quarter, which primarily related to
the same loans that experienced significant allowance for loan loss recoveries discussed below in “Provisions for Loan
Losses and Asset Quality.”
We recorded a negative provision for loan losses of $3.6 million (reduction of the allowance for loan losses) in 2018
compared to a provision for loan losses of $0.7 million in 2017. The negative provision for 2018 was due primarily to
several large loan recoveries realized in the first quarter of 2018 totaling $3.7 million. Generally, our provisions for
loan losses have been low over the past several years due to strong asset quality, including low loan charge-offs.
For the year ended December 31, 2018, noninterest income amounted to $61.8 million compared to $48.9 million for
2017. The primary reasons for the increase in core noninterest income in 2018 were the previously discussed bank
acquisitions and an insurance agency acquisition completed late in 2017, as well as higher income derived from the
Company’s SBA consulting fees and SBA loan sale gains. See the section entitled “Noninterest Income” for additional
information.
Noninterest expenses for the year ended December 31, 2018 amounted to $159.4 million compared to $145.2 million
in 2017. Most categories of noninterest expense experienced general increases in 2018 due to our growth, primarily
due to the previously noted acquisitions. Also impacting expenses were other growth initiatives, including continued
growth of SBA Complete and the SBA Lending Division. See the section entitled “Noninterest Expense” for additional
information.
For the years ended December 31, 2018 and 2017, our effective tax rates were 21.3% and 32.1%, respectively. The
lower effective tax rate in 2018 was due to the Tax Cuts and Jobs Act, which was signed into law in December 2017
and reduced the federal corporate tax rate from 35% to 21%.
Total assets at December 31, 2018 amounted to $5.9 billion, a 5.7% increase from a year earlier. Loan growth for the
year ended December 31, 2018 amounted to $207 million, or 5.1%, and deposit growth amounted to $252.4 million,
or 5.7%.
35
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%
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, 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 Asheville Savings Bank, 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.
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 was 4.08% for 2017 compared to 4.03% for 2016. Asset yields increased primarily as a result
of three Federal Reserve interest rate increases in 2017. Funding costs also increased in 2017, but to a slightly lesser
degree.
36
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 reasons for the increase in core noninterest income in 2017 were the acquisitions 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
SBA Complete and the 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.
Our 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, and required us to revalue our deferred tax
assets and liabilities at the new rate. The impact of revaluing our net deferred tax liability was to reduce income tax
expense by approximately $1.3 million in the fourth quarter of 2017.
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 and Asheville Savings Bank, 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 was driven by Bank’s entrance into the North Carolina markets of
Charlotte, Raleigh, and the Triad.
Outlook for 2019
We generally believe that the outlook for 2019 is favorable. We expect the national economy, as well as our local
economies, to continue to be strong, with unemployment rates remaining at low levels.
The Federal Reserve has increased short-term interest rates by 225 basis points since late 2015. While long-term
interest rates have also increased, they have increased less than short-term interest rates. Generally, our interest-
earning assets have longer terms than our funding costs, and therefore this is potentially an unfavorable rate scenario
for our company because it may result in our asset yields increasing less than our funding costs. Thus far, we have
been able to control the rise in our deposit costs and therefore our net interest margin has been stable, and even
expanded slightly. But due to competitive pressures, this may not be possible in the future, and we expect that
maintaining our recently realized net interest margin will be challenging.
With several consecutive years of low levels of nonperforming assets and low loan charge-offs, we’ve recorded
minimal provisions for loan losses over the past four years and our allowance for loan loss level has trended
downward to a low level by historical standards. While we do not currently anticipate a significant rise in
delinquencies or loan losses, we believe it is likely that we will need to record higher levels of provisions for loan
37
losses than recent years to provide for loan growth and more normal levels of losses. Any credit deterioration would
result in further increases.
We experienced solid organic loan and deposit growth in 2018. Our local economies are strong, and we continue to
experience positive results from our expansion into the larger and higher growth markets in North Carolina. With our
positioning in high growth markets and other strategic initiatives, we expect to experience continued loan and
deposit growth in 2019.
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
38
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
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 SBA Complete, the 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 $222.7 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
39
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 2018 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units was not
impaired.
We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the
difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future
cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple
estimates and assumptions, such as those listed above.
Fair Value and Discount Accretion of 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 SBA Complete, 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.
40
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,
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. We recorded a write-off of the
remaining indemnification asset of $5.7 million upon the termination of the loss share agreements in the third
quarter of 2016.
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 $207.4 million in 2018, $164.7 million in 2017, and $123.4
million in 2016. 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 loans and securities to reported interest
income. Net interest income on a tax-equivalent basis amounted to $209.0 million in 2018, $167.3 million in 2017,
and $125.4 million in 2016. Management believes that analysis of net interest income on a tax-equivalent basis is
useful and appropriate because it allows a comparison of net interest amounts in different periods without taking
into account the different mix of taxable versus non-taxable loans and investments that may have existed during
those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest income.
($ in thousands)
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
Year ended December 31,
2018
$ 207,430
1,594
$ 209,024
2017
164,711
2,590
167,301
2016
123,380
2,054
125,434
Table 2 analyzes net interest income on a tax-equivalent basis. Our net interest income on a tax-equivalent basis
increased by 24.9% in 2018 and increased by 33.4% in 2017. 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 2018 compared to 2017 was primarily due to growth in our loans outstanding,
with a four basis point increase in our net interest margin also contributing to the increase.
For 2018, average loans increased $740.9 million, or 21.7%, while average deposits increased by $820.1 million, or
22.2%. Most of increases in average loans and deposits were due to the acquisitions of Asheville Savings Bank and
Carolina Bank during 2017.
Our net interest margin increased from 4.08% in 2017 to 4.12% in 2018. Asset yields increased by 23 basis points,
from 4.32% to 4.55% during 2018, primarily as a result of four Federal Reserve interest rate increases during the year.
Funding costs also increased, but to a lesser degree, with the average funding cost increasing by only 16 basis points
41
in 2018, from 0.32% in 2017 to 0.48% in 2018. Interest recoveries totaling $750,000 received in the first quarter of
2018 also contributed slightly to the higher net interest margin.
The increase in net interest income in 2017 compared to 2016 was also primarily due to growth in our loans
outstanding, with most of the growth coming from our Carolina Bank and Asheville Savings Bank acquisitions. For
2017, average loans increased $817.6 million, or 31.4%, while average deposits increased by $869.2 million, or 30.7%.
Our net interest margin increased from 4.03% in 2016 to 4.08% in 2017. Asset yields increased by 11 basis points,
from 4.21% to 4.32% during 2017, primarily as a result of three Federal Reserve interest rate increases during the
year. Funding costs also increased, but to a lesser degree, with the average funding cost increasing by only 7 basis
points in 2017, from 0.25% in 2016 to 0.32% in 2017.
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 $7.1 million in
2018, $7.1 million in 2017, and $4.5 million in 2016 in net accretion of purchase accounting premiums/discounts that
increased net interest income.
($ in thousands)
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Year Ended
December 31,
2016
Interest income – increased by accretion of loan discount on acquired loans
Interest expense – reduced by premium amortization of deposits
Interest expense – increased by discount accretion of borrowings
Impact on net interest income
$ 6,951
372
(181)
$ 7,142
6,842
384
(148)
7,078
4,447
77
−
4,524
The biggest component of the purchase accounting adjustments in each year was loan discount accretion, which
amounted to $7.0 million in 2018, $6.8 million in 2017, and $4.4 million in 2016. In 2018 and 2017, the increase in
loan discount accretion was 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 on acquired loans declined from $24.3 million at December 31, 2017 to $17.3
million at December 31, 2018. We expect loan discount accretion on acquired loans to decrease in 2019 as a result of
the expected, normal pay downs on loans within the acquired loan portfolios. In addition to the loan discount
accretion recorded on acquired loans, we recorded loan discount accretion of $0.9 million, $0.2 million and $0 in
2018, 2017, and 2016, respectively, on the discounts associated with the retained unguaranteed portions of SBA loans
sold in the secondary market. At December 31, 2018, 2017, and 2016, unaccreted loan discount on these loans
amounted to $5.7 million, $2.6 million, and $0.6 million, respectively. See Note 1(i) to the Consolidated Financial
Statements for additional information.
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 2017 and 2018. In 2017, we acquired
Carolina Bank and Asheville Savings Bank, which significantly increased our average volumes for loans and deposits in
2017 and 2018. For 2018, higher loan volume positively impacted interest income by $36.3 million, and higher loan
interest rates positively impacted interest income by $8.6 million, with the combined effect driving the increase in
total interest income of $53.8 million. Higher volumes and higher rates paid on deposits drove an increase of $6.9
million in interest expense. Slightly higher levels of borrowings and higher rates paid on those borrowings in 2018
also contributed to the $11.1 million increase in total interest expense. Overall, as Table 3 indicates, net interest
income grew $42.7 million in 2018, with higher volumes comprising $37.6 million of the increase and higher interest
rates resulting in $5.2 million of the increase.
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 increase in total interest
income of $46.4 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 to
42
the $5.1 million increase in total 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 Table 3 indicates, net interest income grew
$41.3 million in 2017, with higher volumes comprising $38.2 million of the increase and higher interest rates causing
$3.1 million of the increase.
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 2018, we recorded total negative provisions for loan losses (reduction of allowance for loan losses) of $3,589,000.
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 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
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 presented separately.
For the years ended December 31, 2018, 2017, and 2016, as it relates to non-covered loans, we recorded a negative
provision for loan losses of $3.6 million, a provision for loan losses of $0.7 million, and a provision for loan losses of
$2.1 million, respectively. The negative provision for 2018 was due primarily to several large loan recoveries realized
in the first quarter of 2018 totaling $3.7 million. The generally low levels of provision for loan losses recorded in
recent years were primarily the result of a sustained period of stable and improving loan quality trends, which
resulted in lower amounts of provision 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. For the last three
years, the new periods being added into the model continue to have significantly lower net charge-offs/recoveries
than the older periods rolling out of the model. This has resulted in a lower required amount of allowance for loan
losses in our modeling. Thus, the low level of net-charge offs (or net recoveries) experienced over the past three
years has been the primary reason for the low (or negative) provisions for loan losses recorded.
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. The negative provision in 2016 resulted from improved asset quality and net loan recoveries
(recoveries, net of charge-offs) that totaled $1.7 million in 2016.
As shown in Table 14, total net charge-offs (recoveries) for the years ended December 31, 2018, 2017, and 2016,
were ($1.3 million), $1.2 million, and $3.7 million, 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.
In 2018, we completed a loan sale of approximately $5.2 million in smaller balance nonperforming loans that resulted
in loan charge-offs of $2.2 million. However, this was more than offset by full payoffs on four loans received in the
first quarter of 2018 that resulted in recoveries to the allowance for loan losses of $3.3 million
See “Nonperforming Assets” below for further discussion of our asset quality, which impacts our provisions for loan
losses.
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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 $61.8 million in 2018, $48.9 million in 2017, and $25.6 million in 2016.
Management evaluates noninterest income on a core and non-core basis. 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
$61.7 million in 2018, a 25.1% increase from the $49.3 million recorded in 2017. The 2017 core noninterest income of
$49.3 million was a 40.9% increase from the $35.0 million recorded in 2016.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
For most categories of noninterest income, our 2017 acquisitions of Carolina Bank and Asheville Savings Bank had the
effect of increasing noninterest income in 2017 in comparison to 2016 and in 2018 in comparison to 2017, due to the
impact of a full year of income being realized.
Service charges on deposit accounts amounted to $12.7 million, $11.9 million, and $10.6 million in 2018, 2017, and
2016, respectively. In 2018 and 2017, the increase is primarily due to the aforementioned acquisitions.
Other service charges, commissions and fees amounted to $19.9 million in 2018, a 36.5% increase from the $14.6
million in 2017. The 2017 amount of $14.6 million was 22.6% higher than the $11.9 million earned in 2016. 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 increases in
this line item in 2018 and 2017 were 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 2018 and 2017, increased
debit and credit card usage by our customers increased this income component, as we earn a small fee each time our
customers make a card transaction. We believe the growth in card usage by our customers is due to customer
payment preferences, as well as a result of the continued promotion of these products.
Fees from presold mortgages amounted to $2.7 million in 2018, $5.7 million in 2017, and $2.0 million in 2016. In
2018, the declines were primarily due to: i) overall lower volumes in the mortgage industry, ii) our Mortgage Loan
Division originating a higher percentage of loans with construction components that are held in our loan portfolio and
not sold, and iii) mortgage origination employees who left the Company in 2018. In 2017, the higher fees were
primarily due to the acquisition of Carolina Bank in March 2017, which had a significant mortgage loan operation.
Commissions from sales of insurance and financial products amounted to $8.7 million in 2018, $5.3 million in 2017,
and $3.8 million in 2016. This line item includes commissions we receive from two primary sources – 1) commissions
from the sales of investment, annuity, and long term care insurance products, and 2) commissions from the sale of
property and casualty insurance. The following table presents the contribution of each source to the total amount
recognized in this line item:
44
($ 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,
2018
2017
2016
$ 2,693
6,038
$ 8,731
2,152
2,027
3,148
5,300
1,763
3,790
As can be seen in the above table, sales of property and casualty insurance increased significantly in 2017 and again in
2018, which was due to our September 1, 2017 acquisition of Bear Insurance Services (see Note 2 to the consolidated
financial statements for additional information). Sales of investments, annuities and long term care insurance
increased in 2018 due to the acquisitions of Asheville Savings Bank and Carolina Bank, each of which had wealth
management divisions.
Another primary reason for the increases in core noninterest income in 2018 and 2017 was the addition of SBA
consulting fees and SBA loan sale gains that we began to realize in the last half of 2016. As previously discussed, in
2016, we completed the acquisition of SBA Complete, 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. For the full year of 2017, we recorded $4.0 million in SBA consulting
fees, and this amount grew to $4.7 million in 2018.
Additionally, in the third quarter of 2016, we leveraged the expertise we gained from personnel assumed in the SBA
Complete acquisition and launched our SBA Lending Division, which offers SBA loans to small business owners
throughout the United States. Our SBA Lending 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 originated $95.4
million in loans and recorded $5.5 million in gains from sales. And in 2018, this division originated $196.8 million in
SBA loans and recorded $10.4 million in gains from sales.
Table 4 shows earnings from bank-owned life insurance income were $2.5 million in 2018, $2.3 million in 2017, and
$2.1 million in 2016. 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 2017 and 2018.
Noninterest income not considered to be “core” resulted in net increases (reductions) to total noninterest income of
$0.2 million in 2018, ($0.4 million) in 2017, and ($9.4 million) in 2016. 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 foreclosed properties of $0.6 million in 2018, $0.5 million in 2017, and $0.6 million in
2016.
For the year ended December 31, 2016, FDIC indemnification asset expense amounted to $10.3 million, which
included the write-off of the remaining indemnification asset of $5.7 million when we terminated the FDIC loss share
agreements.
In 2016, the Company recorded a net gain of $1.5 million as a result of a branch exchange transaction with another
community bank (see Note 2 of the consolidated financial statements for additional discussion).
“Other gains (losses), net” for the 2018, 2017, and 2016 periods represent the net effects of miscellaneous gains and
losses that are non-routine in nature. In 2018, we recorded other gains of $0.7 million, which primarily related to a
gain on the sale of a previously closed branch building.
45
Noninterest Expenses
Total noninterest expenses totaled $159.4 million, $145.2 million, and $106.8 million for 2018, 2017 and 2016,
respectively. Table 5 presents the components of our noninterest expense during the past three years. The primary
reason for the increase in noninterest expense in 2018 and 2017 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 $82.1 million in 2017 to $92.0 million in 2018, an increase of $9.9 million, or
12.0%. Within personnel expense, salaries expense increased by $8.3 million in 2018 and employee benefits expense
increased by $1.6 million in 2018. The primary reason for these increases in personnel expense is due to having a full
year of expense for the additional personnel assumed in the 2017 acquisitions of Carolina Bank, Asheville Savings
Bank, and Bear Insurance Services. Also, approximately $1.3 million of the increase in personnel expense in 2018 can
be attributed to increases in salaries expense related to our SBA lending activities. Also impacting personnel expense
was an increase in the 401(k) match offered by the Company to employees that was effective January 1, 2018, which
increased from 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.
In 2017, total personnel expense increased to $82.1 million from $62.8 million in 2016, an increase of $19.3 million, or
30.7%. Within personnel expense, salaries expense increased by $15.5 million in 2017 and employee benefits
expense increased by $3.7 million in 2017. The primary reason for these increases in personnel expense was due to
the additional personnel assumed in the Carolina Bank and Asheville Savings Bank acquisitions. Also, in 2017, we
added personnel due to the continued growth of SBA Complete and our SBA 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.
Net occupancy expenses amounted to $10.8 million in 2018, $9.7 million in 2017, and $7.8 million in 2016. The
increases in 2018 and 2017 were related to the aforementioned acquisitions and expansion initiatives. Equipment
related expenses increased for the same reasons, amounting to $5.6 million, $4.5 million, and $3.6 million, in 2018,
2017, and 2016, respectively.
Merger and acquisition expenses amounted to $2.4 million in 2018, $8.1 million in 2017, and $1.4 million in 2016.
The 2018 amount was primarily comprised of severance costs and data processing conversion expenses related to the
acquisition of Asheville Savings Bank. 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, which was announced in 2016.
Intangible amortization expense increased from $1.2 million in 2016 to $4.2 million in 2017 to $6.8 million in 2018,
due to the addition of $22.5 million in amortizable intangible assets recorded in connection with the 2017 acquisitions
of Carolina Bank, Asheville Savings Bank, and Bear Insurance Services.
FDIC insurance expense amounted to $2.3 million in 2018, $2.4 million in 2017, and $2.0 million in 2016. As discussed
previously in the section “FDIC Insurance”, in 2019, we received an assessment credit of $1.3 million that will be used
to offset future FDIC insurance expense once the DIF reaches 1.38%.
Outside consultant expense amounted to $1.8 million in 2018, $2.5 million in 2017, and $1.7 million in 2016. The
increase in 2017 related to various operational activities.
Data processing expenses amounted to $3.2 million, $2.9 million, and $2.0 million, in 2018, 2017, and 2016,
respectively. The 2018 and 2017 increases were due primarily to the acquisitions of Carolina Bank and Asheville
Savings Bank.
46
Marketing expense amounted to $3.1 million in 2018, $2.5 million in 2017 and $2.0 million in 2016. In 2018 and
2017, we increased our promotional efforts, primarily in our new and expanded market areas.
Non-credit losses amounted to $1.0 million in 2018, $0.9 million in 2017, and $1.2 million in 2016. These losses
primarily related to debit card and credit card fraud losses.
Income Taxes
Table 6 presents the components of income tax expense and the related effective tax rates. We recorded income tax
expense of $24.2 million in 2018, $21.8 million in 2017, and $14.6 million in 2016. Our effective tax rates were 21.3%
for 2018, 32.1% for 2017, and 34.7% for 2016. The lower effective rates in 2017 and 2018 compared to 2016 were as
a result of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017, which reduced the federal
statutory income tax rate from 35% to 21%. At December 31, 2017, we revalued our net deferred tax liability, which
reduced income tax expense by $1.3 million for 2017, while in 2018, the new income tax rate of 21% reduced our
effective tax rate.
Also, our effective tax rate has partially declined in recent years due lower statutory income tax rates in North
Carolina. North Carolina reduced the state income tax rate for corporations from 4.0% in 2016 to 3.0% beginning in
2017. We expect our effective tax rate to be approximately 21.0% in 2019.
Stock-Based Compensation
We recorded stock-based compensation expense of $1.6 million, $1.1 million, and $0.7 million, for the years ended
December 31, 2018, 2017, and 2016, respectively. The increases in this expense were due to retention-based
restricted stock grants made to certain officers during the years presented. See Note 15 to the consolidated financial
statements for more information regarding stock-based compensation.
47
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
At December 31, 2018, our total assets amounted to $5.9 billion, a 5.7% increase from 2017. The following table
presents detailed information regarding the nature of changes in our loans and deposits in 2017 and 2018:
($ in thousands)
2018
Balance at
beginning of
period
Internal
growth,
net
Growth from
Acquisitions
(1)
Balance at
end of
period
Total
percentage
growth
Internal
percentage
growth (1)
Loans outstanding
$ 4,042,369
206,695
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
1,196,161
884,254
982,822
454,860
239,659
7,995
347,862
293,342
$ 4,406,955
123,970
32,120
52,701
(22,471)
216
(4,567)
99,757
(29,342)
252,384
−
−
−
−
−
−
−
−
−
−
4,249,064
5.1%
5.1%
1,320,131
916,374
1,035,523
432,389
239,875
3,428
447,619
264,000
4,659,339
10.4%
3.6%
5.4%
-4.9%
0.1%
-57.1%
28.7%
-10.0%
5.7%
10.4%
3.6%
5.4%
-4.9%
0.1%
-57.1%
28.7%
-10.0%
5.7%
2017
Loans outstanding
$ 2,710,712
227,955
1,103,702
4,042,369
49.1%
8.4%
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
________________________________
756,003
635,431
683,680
209,074
136,466
−
287,939
238,760
$ 2,947,353
159,493
13,847
23,013
(5,174)
57,554
(3,253)
(12,631)
(37,765)
195,084
280,665
234,976
276,129
250,960
45,639
11,248
72,554
92,347
1,264,518
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%
21.1%
2.2%
3.4%
-2.5%
42.2%
n/m
-4.4%
-15.8%
6.6%
(1)
In 2017, we acquired Carolina Bank, which had $497.5 million in loans and $585.4 million in deposits, and Asheville Savings Bank, which had
$606.2 million in loans and $679.1 million in deposits.
n/m – not meaningful
As shown in the table above, in 2018, our total loans outstanding increased $206.7 million, or 5.1%. Internal loan
growth has been primarily driven by our expansion in high-growth markets, hiring of experienced bankers, and our
emphasis on SBA lending. We expect continued growth in our loan portfolio for 2019.
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. Internal growth in our loan
portfolio amounted to $228.0 million, or 8.4%. Internal loan growth was primarily driven by our recent expansion
into high-growth markets and the hiring of experienced bankers in these areas.
During 2018, we experienced an increase in total deposits of $252.4 million, or 5.7%. We experienced internal growth
of $186.3 million in our core deposit accounts (checking, money market and savings), and increases of $70.4 million in
our retail time deposits, excluding brokered and internet deposits. Total brokered and internet deposits remained
consistent from the year earlier. We have generally experienced higher growth in our core transaction accounts
compared to time deposits, which we believe is due customers favoring transaction accounts due to their higher
48
liquidity and the fact that transaction accounts have not been paying materially lower interest rates compared to time
deposits. However, we have recently seen some of our customers with larger balances transfer funds from their
money market accounts to the time deposit > $100,000 category to attain higher interest rates.
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 was 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.
Our overall liquidity increased at December 31, 2018 compared to a year earlier. Our liquid assets (cash and
securities) as a percentage of our total deposits and borrowings was 21.03% at December 31, 2018 compared to
20.0% at December 31, 2017. Brokered deposits and borrowings as a percent of overall funding remained
substantially unchanged from a year earlier.
At December 31, 2018, our nonperforming assets to total assets ratio was 0.74% compared to 0.96% at December 31,
2017. The decrease is primarily due to 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, 2018,
2017, and 2016.
Our balance sheet mix has remained relatively stable over the past three years. On the asset side, net loans have
consistently comprised 72% to 74% of total assets and interest-earning assets have ranged from 88%-90%. Late in
2018, we used existing cash balances to purchase approximately $150 million in available for sale securities, which
resulted in our mix of securities available for sale increasing from 6% of total assets to 9% of total assets at the end of
2018. Intangible assets increased from 2% of total assets in 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 $155.2 million in goodwill and $18.7
million in other intangible assets.
On the liability side, deposits have consistently comprised 79% to 82% of total liabilities and shareholders’ equity.
Shareholders’ equity increased from 10% of total liabilities and shareholders’ equity at December 31, 2016 to 13% at
December 31, 2018 due to the common stock issued in connection with our 2017 acquisitions and an increase in
retained earnings due to high levels of net income recorded.
Securities
Information regarding our securities portfolio as of December 31, 2018, 2017, and 2016 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.
49
Total securities amounted to $602.6 million, $461.8 million, and $329.0 million at December 31, 2018, 2017, and
2016, respectively. The increase in securities in 2018 was primarily due to our purchase of approximately $150
million of government-sponsored enterprise securities and mortgage-backed securities that we initiated in order to
deploy excess cash into higher yielding assets. 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, in late 2017 we sold $95.0 million in
securities that we had 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 majority of our “government-sponsored enterprise” securities carry one maturity date, often with an issuer call
feature. At December 31, 2018, of the $82.7 million in government-sponsored enterprise securities, $70.5 million
were issued by the Federal Home Loan Bank system and the remaining $12.2 million were issued by either Fannie
Mae, Freddie Mac, or Federal Farm Credit Bank system.
Nearly all of our $437.6 million in total mortgage-backed securities have been issued by Freddie Mac, Fannie Mae,
Ginnie Mae, or the SBA, each of which is a government agency or government-sponsored corporation and guarantees
the repayment of the securities. Included in the mortgage-backed securities at December 31, 2018, were commercial
mortgage-backed securities of $159.6 million that were issued and are guaranteed by Ginnie Mae. Mortgage-backed
securities vary in their repayment in correlation with the underlying pools of mortgage loans.
Our investment policy permits to hold up to 15% of our securities portfolio in corporate bonds. These bonds have the
most credit risk of any of our securities. At December 31, 2018, our $33.1 million investment in corporate bonds was
comprised of the following:
($ 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 Moody’s
(2) Rating issued by Kroll Bond Rating Agency
Issuer
Ratings
A3
Baa1
A3
A2
BBB-
A3
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
6,027
5,073
5,018
4,000
3,092
2,541
1,000
$ 33,751
Fair Value
6,879
5,920
4,937
4,904
4,058
3,001
2,559
880
33,138
We have concluded that any unrealized losses associated with our corporate bonds are due to interest rate
considerations and not due to credit concerns.
At December 31, 2018, we held $101.2 million in securities classified as held to maturity, which had a carrying value
that exceeded their fair value by $1.3 million. Approximately $52.0 million of the securities held to maturity are
mortgage-backed securities that have been issued by either Freddie Mac or Fannie Mae. The remaining $49.2 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 no significant concentration of bond holdings from one government entity,
with the single largest exposure to any one entity being $4.7 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, 2018, 2017, and 2016, net unrealized losses of $12.4 million, $2.2 million and $3.1 million,
respectively, were included in the carrying value of securities classified as available for sale. Management evaluated
any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and
50
caused by fluctuations in market interest rates and the overall economic environment, not by concerns about the
ability of the issuers to meet their obligations. Net unrealized losses, net of applicable deferred income taxes, have
been reported as part of a separate component of shareholders’ equity (accumulated other comprehensive income)
as of December 31, 2018, 2017, and 2016, respectively.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 2.87% at December
31, 2018. The expected weighted average life of the available for sale portfolio using the call date for above-market
callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected life for mortgage-
backed securities, was 6.1 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 3.17% at December
31, 2018. The expected weighted average life of the held to maturity portfolio using the call date for above-market
callable bonds, the expected life for mortgage-backed securities, and the maturity date for all other securities, was
2.6 years.
The following table provides the names of issuers for which the Company has investment securities totaling in excess
of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of December 31, 2018.
All of these securities are issued by government sponsored corporations.
($ in thousands)
Issuer
Fannie Mae
Ginnie Mae
Freddie Mac
Total
Loans
Amortized Cost
$ 191,839
127,358
98,608
$ 417,805
Fair Value
186,735
123,593
95,285
405,613
% of
Shareholders’
Equity
25.1%
16.7%
12.9%
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. The majority of our loan portfolio is within our
39 county market area, which are located in western, central and eastern North Carolina and three counties in
northeastern South Carolina. The diversity of the economic bases of our market areas has historically provided a
stable lending environment.
In 2018, loans outstanding increased $206.7 million, or 5.1%. The growth in 2018 was due to organic loan growth,
which was concentrated primarily within our higher growth markets and from the SBA Lending Division. 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.
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.
Commercial, financial, and agricultural loans have increased from 7% at December 31, 2014 to 11% at December 31,
2018, due primarily to growth in loans made to municipalities and loans originated by our SBA Lending Division.
51
Residential real estate loans have declined from 33% of total loans at December 31, 2014 to 25% of total loans at
December 31, 2018. 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 2017 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. Also, growth in our SBA loan portfolio has
contributed to the increase in this category.
Table 11 provides a summary of scheduled loan maturities over certain time periods, with fixed rate loans and
adjustable rate loans shown separately. Approximately 13% of our accruing loans outstanding at December 31, 2018
mature within one year and 56% of total loans mature within five years, with both of those measures being consistent
with recent years. As of December 31, 2018, the percentages of variable rate loans and fixed rate loans as compared
to total performing loans were 35% and 65%, respectively. We intentionally make a blend of fixed and variable rate
loans so as to reduce interest rate risk. The mix of fixed rate loans has generally increased over the past several years
because many borrowers have desired to lock in a low 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
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 during 2016, and all assets became non-covered.
Since the height of the recession, we have benefited from improving economic conditions and also implemented a
combination of strategies to reduce nonperforming assets, including a significant 2013 loan sale. As a result, our
nonperforming asset levels have declined steadily over the years, with nonperforming assets amounting to amounting
to just 0.74% of total assets at December 31, 2018. This compares to ratios of 0.96% and 1.64% at December 31,
2017 and 2016, respectively. In 2018, our nonperforming asset levels benefitted from a loan sale of approximately
$5.2 million in smaller balance nonperforming loans.
Table 12a presents our nonperforming assets at December 31, 2018 by general geographic region.
52
The following is the composition, by loan type, of all of our nonaccrual loans at each period end:
($ 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,
2018
$ 919
2,265
10,115
1,685
7,452
139
$ 22,575
At December 31,
2017
1,001
1,822
12,201
2,524
3,345
75
20,968
The nonaccrual table above generally indicates that almost all categories of nonaccrual loans remained relatively level
during the year, with the “real estate – mortgage – commercial and other” category experiencing the largest increase.
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 $1 to $5 million of loans that were performing in
accordance with their contractual terms at December 31, 2018 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, 2018 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been
disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not represent or
result from trends or uncertainties that management reasonably expects will materially impact future operating
results, liquidity, or capital resources, or represent material credits about which management is aware of any
information that causes management to have serious doubts as to the ability of such borrowers to comply with the
loan repayment terms.
We provide additional information regarding the classification status of our loans in tables contained in Note 4 to our
consolidated financial statements. Those tables indicate that from December 31, 2017 to December 31, 2018 our
asset quality improved, with total classified and nonaccrual loans decreasing from $79.4 million at December 31, 2017
to $60.8 million at December 31, 2018. This is consistent with our generally improving asset quality trends.
Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $7.4 million,
$12.6 million, and $9.5 million, at December 31, 2018, 2017, and 2016, respectively. Generally, we have experienced
decreases in foreclosed real estate over the past several years primarily due to increased property sales activity 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 and farmland
1-4 family residential properties
Commercial real estate
Total foreclosed real estate
At December 31, 2018
At December 31, 2017
$ 2,035
2,311
3,094
$ 7,440
6,032
4,229
2,310
12,571
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
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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 the majority of these loans is located within our principal market area.
The total allowance for loan losses amounted to $21.0 million at December 31, 2018 compared to $23.3 million at
December 31, 2017 and $23.8 million at December 31, 2016.
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
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 recent years, the new periods have had significantly lower net charge-offs (and net recoveries in
some periods) than the older periods rolling out of the model. This has resulted in a lower required amount of
allowance for loan losses in our modeling. The low level of net-charge offs (or net recoveries) experienced over the
past several years has been the primary reason for the low (or negative) provisions for loan losses recorded.
The ratio of our allowance to total loans was 0.50%, 0.58%, and 0.88% at December 31, 2018, 2017, and 2016,
respectively. The decline in this ratio from December 31, 2017 to December 31, 2018 was a result of the factors
discussed above that impacted our relatively low levels of provision for loan losses. The large 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 on acquired loans, which is available to absorb loan losses, amounted to $17.3 million, $24.3
million, and $12.1 million at December 31, 2018, December 31, 2017, and December 31, 2016, respectively. The
ratios of allowance for loan losses plus unaccreted discount on acquired loans amounted to 0.90%, 1.18%, and 1.32%
at December 31, 2018, December 31, 2017, and December 31, 2016, respectively.
Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated. 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
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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 (recoveries) of total loans amounted to ($1.3 million) in 2018, $1.2 million in 2017, and $3.7
million in 2016. The trend of lower net charge-offs is associated with lower levels of nonperforming loans and credit
improvements in our underlying loan portfolio. In 2018, we received full payoffs on four loans that had been
previously charged-down by approximately $3.3 million and are included in the table as recoveries, contributing
significantly to the net recovery position for the year.
Deposits
Deposits are a critical part of our business, as they provide the primary funding source for our loans and investments.
Accordingly, as discussed below, we have implemented various strategies and developed competitive products to
promote growth of our deposit balances.
At December 31, 2018, deposits outstanding amounted to $4.66 billion, an increase 5.7%, or $252.4 million, from the
$4.41 billion at December 31, 2017, all of which was organic growth. We experienced higher growth in our
transaction accounts (checking, money market, and savings) compared to time deposits, which we believe is due
customers favoring transaction accounts due to their higher liquidity and the fact that transaction accounts have not
been paying materially lower interest rates compared to time deposits. However, we have recently seen some of our
customers with larger balances transfer funds from their money market accounts to the time deposit > $100,000
category to attain higher interest rates.
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 of 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 was a 75.6% increase from the $136.5 million outstanding a year earlier. The increased usage of
brokered deposits in 2017 was necessary because of high organic loan growth that exceeded deposit growth. This
imbalance of growth was largely associated with our 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.
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The nature of our deposit growth is illustrated in the table on page 48. 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
Time deposits - Brokered
Time deposits > $100,000 – retail
Time deposits < $100,000 – retail
Total deposits
2018
28%
20%
22%
9%
5%
10%
6%
100%
2017
27%
20%
22%
10%
6%
8%
7%
100%
2016
26%
21%
23%
7%
5%
10%
8%
100%
Our deposit mix remains heavily concentrated in transaction and non-time deposit accounts, with time deposits only
comprising approximately 20% of total deposits. This is beneficial for us, as these accounts generally carry lower
interest rates compared to time deposits. Prior to the very low interest rate environment that we have been in for
the past decade, the time deposit concentration was closer to 50%. We believe the lower mix of time deposits has
been due to the relatively small gap between the interest rates that we pay on transaction accounts versus the rates
we pay on time deposits. It is uncertain whether the interest rate increases over the past two years will result in a
significant shift back to time deposits.
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, 2018, 2017, and 2016.
As of December 31, 2018, we held approximately $690.9 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, 2018. This table shows that 80% of our
time deposits greater than $100,000 mature within one year.
At each of the past three year ends, we have no deposits issued through foreign offices, nor do we believe that we
held any deposits by foreign depositors.
Borrowings
We typically utilize borrowings to provide balance sheet liquidity and to fund imbalances in our loan growth
compared to our deposit growth. Our borrowings outstanding totaled $406.6 million at December 31, 2018, $407.5
million at December 31, 2017, and $271.4 million at December 31, 2016. Table 2 shows that average borrowings
were $406.9 million in 2018, $325.9 million in 2017, and $209.7 million in 2016.
The increase in borrowings from 2016 to 2017 was to fund organic loan growth, which exceeded deposit growth in
2016 and 2017. Additionally, we assumed approximately $42 million of borrowings in our two whole-bank
acquisitions in 2017. In 2018, borrowings remained essentially unchanged as deposit growth fully funded our loan
growth for the year.
At December 31, 2018, the Company had three sources of readily available borrowing capacity – 1) an approximately
$1.04 billion line of credit with the FHLB, of which $353 million and $354 million was outstanding at December 31,
2018 and 2017, respectively, 2) a $35 million federal funds line of credit with a correspondent bank, of which none
was outstanding at December 31, 2018 or 2017, and 3) an approximately $127 million line of credit through the
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Federal Reserve Bank of Richmond’s (“FRB”) discount window, of which none was outstanding at December 31, 2018
or 2017.
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 $190 million and $198 million at December 31, 2018 and 2017,
respectively, as a result of our pledging letters of credit backed by the FHLB for public deposits at each of those dates.
Thus, our unused available line of credit with the FHLB amounted to approximately $502 million at December 31,
2018 compared to $384 million a year earlier.
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, 2018, the average amount of FHLB borrowings outstanding was
approximately $353.2 million with a weighted average interest rate for the year of 1.91%. The maximum amount of
short-term FHLB borrowings outstanding at any month-end during 2018 was $353.5 million. 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 $354.0 million.
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, 2018 or 2017.
There were no federal funds purchased outstanding at any month-end during 2018 or 2017.
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, 2018, the available line of credit was approximately $127 million. At December 31, 2018 and 2017, we
had no borrowings outstanding under this line.
In addition to the lines of credit described above, we also have of $56.7 million of trust preferred security debt
outstanding at December 31, 2018 and 2017. Each of our three issuances 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, but do not expect to do so. The interest rate on
these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.70% for $20.6 million, three-
month LIBOR plus 1.39% on $25.8 million, and LIBOR + 2.00% for $10.3 million that was assumed in the Carolina Bank
acquisition.
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, 2018, we had the ability to
obtain borrowings from the following three sources – 1) an approximately $1 billion line of credit with the FHLB, 2) a
$35 million federal funds line with a correspondent bank, and 3) an approximately $127 million line of credit through
the FRB’s discount window.
Our overall liquidity increased in 2018 compared to 2017. Our liquid assets (cash and securities) as a percentage of
our total deposits and borrowings amounted to 21.0% at December 31, 2018 compared to 20.0% at December 31,
2017.
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We continue to believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain
adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position
carefully and will explore and implement strategies to increase liquidity if deemed appropriate.
In the normal course of business we have various outstanding contractual obligations that will require future cash
outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that
may or may not require future cash outflows.
Table 18 reflects our contractual obligations and other commercial commitments outstanding as of December 31,
2018. Any of our $353 million in outstanding borrowings with the FHLB may be accelerated immediately by the FHLB
in certain circumstances, including material adverse changes in our condition or if our qualifying collateral is less than
the amount required under the terms of the borrowing agreement.
In the normal course of business there are various outstanding commitments and contingent liabilities such as
commitments to extend credit, which are not reflected in the financial statements. The following table presents a
summary of our outstanding loan commitments as of December 31, 2018:
($ 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
$ 210
150
$ 360
Variable Rate
460
469
929
Total
670
619
1,289
At December 31, 2018 and 2017, we also had $15.7 million and $15.2 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 stand-alone obligation made on behalf of our customers to suppliers of the
customers to guarantee payments owed to the supplier by the customer. The standby letters of credit are generally
for terms of one year, at which time they may be renewed for another year if both parties agree. The payment of the
guarantees would generally be triggered by a continued nonpayment of an obligation owed by the customer to the
supplier. The maximum potential amount of future payments (undiscounted) we could be required to make under
the guarantees in the event of nonperformance by the parties to whom credit or financial guarantees have been
extended is represented by the contractual amount of the financial instruments discussed above. In the event that
we are required to honor a standby letter of credit, a note, already executed by the customer, becomes effective
providing repayment terms and any collateral. Over the past two years, we have had to honor only a few standby
letters of credit, none of which resulted in any loss to the Company. We expect any draws under existing
commitments to be funded through normal operations.
It has been our experience that deposit withdrawals are generally able to be replaced with new deposits when
needed. Based on that assumption, management believes that it can meet its contractual cash obligations and
existing commitments from normal operations.
We are not involved in any legal proceedings that, in management’s opinion, are likely to have a material effect on
the consolidated financial position of the Company.
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2018 amount to $764.2 million compared to $693.0 million at December 31,
2017 and $368.1 million at December 31, 2016. 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 can significantly increase shareholders’ equity,
including those associated with acquisitions. Although we have not repurchased any stock since 2014, we have a $25
million authorization currently in place and any stock repurchases would reduce shareholders’ equity.
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In 2018, the most significant factors that impacted our equity were 1) the $89.3 million net income reported for 2018,
which increased equity, and 2) common stock dividends declared of $11.9 million, which reduced equity. See the
Consolidated Statements of Shareholders’ Equity within the consolidated financial statements for disclosure of other
less significant items affecting 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 Company stock, which was valued at $7.7 million on the
date of acquisition. Subsequent to the acquisition in 2017, approximately $4.5 million of the deferred compensation
has been paid to the plan participants. The balances of the related asset and liability were each $3.2 million at
December 31, 2018, both of which are presented as components of 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 common stock for the same number of shares of our
preferred 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, 2018, 2017, and 2016, we had no shares of preferred
stock outstanding.
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
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 and
the Commissioner. 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.
Table 21 presents our regulatory capital ratios as of December 31, 2018, 2017, and 2016. 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, 2018, our tier 1 leverage ratio was 10.47% compared
to the regulatory well capitalized bank-level threshold of 5.00% and our total risk-based capital ratio was 13.97%
compared to the 10.00% regulatory 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 9.07% at December 31, 2018 compared to 8.23% at December 31, 2017.
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.
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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, 2018 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, 2018.
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), even during periods of changing interest rates. 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 4.58% (realized in 2014). From 2008 until the fourth
quarter of 2015, the prime rate of interest had remained at 3.25%. Beginning in December 2015, the Federal Reserve
began steadily increasing the prime rate of interest, which resulted in 5.50% rate at December 31, 2018. The
consistency of the net interest margin is aided by the relatively low level of long-term interest rate exposure that we
maintain. At December 31, 2018, approximately 77% 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, 2018, 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 Table 17, at December 31, 2018, we had $1.4 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, 2018 were deposits totaling $2.4 billion comprised of checking, savings, and certain types of
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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 twelve months), this generally 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 and longer 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 Bank, 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 very 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.
As it relates to deposits, as noted above, the Federal Reserve made no changes to the short term interest rates it sets
directly from 2008 until mid-December 2015, and during that period we were 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 a result of the nine interest rate increases initiated
by the Federal Reserve since 2015 and significant competitive pressures in our market area, we have had to increase
deposit rates. Deposit pricing competition intensified in the second half of 2018 and we expect it to continue.
However, to date, our deposit costs have risen at a slightly lower rate than the increase in asset yields, and thus our
net interest margin expanded slightly in 2017 and 2018.
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 amounted to $7.0 million, $6.8
million, and $4.4 million in 2018, 2017, and 2016, 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 $17.3 million at December 31, 2018 compared to $24.3 million at December 31, 2017.
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Based on our most recent interest rate modeling, which assumes one interest rate increase for 2019 (federal funds
rate = 2.75%, prime = 5.75%), we project that our net interest margin for 2019 will continue to remain fairly stable,
but we believe there is downside risk due to the loan and deposit pricing pressures discussed above.
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 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.”
62
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
Nonperforming assets to total assets at year end
Net charge-offs (recoveries) to average total loans
Nonfinancial Data – number of branches
Nonfinancial Data – number of employees (FTEs)
2018
2017
2016
2015
2014
$ 231,207
23,777
207,430
(3,589)
211,019
61,834
159,375
113,478
24,189
89,289
−
89,289
3.02
3.01
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
$ 0.40
0.32
0.32
0.32
0.32
43.14
30.50
32.66
25.71
17.12
$ 5,864,116
4,249,064
−
4,249,064
21,039
255,480
4,659,339
406,609
764,230
$ 5,693,760
4,161,838
5,076,335
4,516,811
3,663,077
727,920
1.57%
12.27%
4.12%
9.07%
91.19%
0.50%
0.74%
(0.03%)
101
1,076
41.76
26.47
35.31
23.38
14.69
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
1.00%
8.62%
4.08%
8.23%
91.73%
0.58%
0.96%
0.04%
104
1,140
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
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
0.80%
7.73%
4.03%
8.16%
91.97%
0.88%
1.64%
0.14%
88
834
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
0.82%
8.04%
4.13%
8.13%
89.60%
1.13%
2.66%
0.46%
88
812
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
0.75%
7.73%
4.58%
7.90%
88.88%
1.70%
3.54%
0.74%
87
798
(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.
63
Table 2 Average Balances and Net Interest Income Analysis
2018
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
Year Ended December 31,
2017
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2016
Avg.
Rate
Interest
Earned
or Paid
$ 4,161,838
419,356
50,945
5.01%
2.54%
2.91%
$ 208,609
10,638
1,482
$ 3,420,939
302,892
56,065
4.79%
2.31%
2.99%
$ 163,738
7,007
1,677
$ 2,603,327
298,083
49,986
4.66%
2.07%
3.50%
$ 121,322
6,162
1,748
444,196
5,076,335
80,053
115,573
421,799
$ 5,693,760
2.36%
4.55%
10,478
231,207
322,053
4,101,949
79,025
98,216
311,596
$ 4,590,786
1.54%
4.32%
4,960
177,382
157,522
3,108,918
59,835
76,418
177,096
$ 3,422,267
1.11%
4.21%
1,755
130,987
$ 875,751
1,023,162
439,880
641,516
275,904
3,256,213
406,864
0.10%
0.32%
0.21%
1.30%
0.38%
0.45%
2.28%
$ 887
3,265
922
8,356
1,061
$ 722,286
825,015
385,967
504,349
261,910
14,491
9,286
2,699,527
325,874
0.07%
0.19%
0.19%
0.79%
0.30%
0.28%
1.57%
$ 477
1,569
715
4,005
778
$ 583,786
657,211
200,093
405,220
268,854
7,544
5,127
2,115,164
209,659
0.06%
0.18%
0.05%
0.65%
0.33%
0.24%
1.16%
3,663,077
0.65%
23,777
3,025,401
0.42%
12,671
2,324,823
0.33%
1,260,598
4,923,675
42,165
727,920
0.48%
997,203
4,022,604
34,977
533,205
0.32%
712,349
3,037,172
24,380
360,715
0.25%
$ 360
1,160
100
2,654
896
5,170
2,437
7,607
$ 5,693,760
$ 4,590,786
$ 3,422,267
4.09%
$ 207,430
4.02%
$ 164,711
3.97%
$ 123,380
4.12%
$ 209,024
4.08%
$ 167,301
4.03%
$ 125,434
3.90%
4.91%
3.90%
4.10%
3.88%
3.51%
($ in thousands)
Assets
Loans (1) (2)
Taxable securities
Non-taxable securities
Short-term investments,
primarily overnight funds
Total interest-earning assets
Cash and due from banks
Premises and equipment
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
Total sources of funds
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net yield on interest-
earning assets and
net interest income
Net yield on interest-
earning assets and
net interest income –
tax-equivalent (3)
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 $1,905, $536, and ($457) for 2018, 2017, and 2016, respectively.
Includes accretion of discount on acquired and SBA loans of $7,812, $7,076, and $4,451 in 2018, 2017, and 2016, respectively.
Includes tax-equivalent adjustments of $1,594, $2,590, and $2,054 in 2018, 2017, and 2016, respectively, to reflect the federal and state tax benefit
that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to
their tax exempt status. This amount has been computed assuming a 23% tax rate for 2018 and 37% for 2017 and 2016 and is reduced by the related
nondeductible portion of interest expense.
64
Table 3 Volume and Rate Variance Analysis
($ in thousands)
Interest income:
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, 2018
Year Ended December 31, 2017
Change Attributable to
Change Attributable to
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$ 36,299
2,824
(151)
2,381
41,353
128
505
106
1,438
48
2,225
1,561
3,786
8,572
807
(44)
3,137
12,472
282
1,191
101
2,913
235
4,722
2,598
7,320
44,871
3,631
(195)
5,518
53,825
410
1,696
207
4,351
283
6,947
4,159
11,106
38,618
105
197
2,184
41,104
88
308
219
718
(22)
1,311
1,590
2,901
3,798
740
(268)
1,021
5,291
29
101
396
633
(96)
1,063
1,100
2,163
42,416
845
(71)
3,205
46,395
117
409
615
1,351
(118)
2,374
2,690
5,064
Net interest income
$ 37,567
5,152
42,719
38,203
3,128
41,331
________________________________
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 mortgage loans
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
FDIC Indemnification asset income (expense), net
Securities gains (losses), net
Gain on branch sale
Other gains (losses), net
Total
2018
$ 12,690
19,945
2,735
8,731
4,675
10,366
2,534
61,676
(565)
−
−
−
723
$ 61,834
Year Ended December 31,
2017
11,862
14,610
5,695
5,300
4,024
5,479
2,321
49,291
(531)
−
(235)
−
383
48,908
2016
10,571
11,913
2,033
3,790
3,199
1,433
2,052
34,991
(625)
(10,255)
3
1,466
(29)
25,551
65
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
Dues and subscriptions expense (includes software licenses)
Credit/debit card processing expense
Marketing expense
Data processing expense
Telephone and data lines
Stationery and supplies
FDIC insurance expense
Outside consultants
Repossession and collection expenses
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
Year Ended December 31,
2018
2017
2016
$ 75,077
16,888
91,965
10,793
5,627
2,358
6,763
3,431
3,411
3,065
3,234
3,024
2,582
2,333
1,820
1,366
960
16,643
$ 159,375
66,786
15,313
82,099
9,661
4,480
8,073
4,240
1,969
2,797
2,549
2,910
2,470
2,399
2,350
2,511
1,736
887
14,026
145,157
2018
$ 19,188
3,187
1,658
156
$ 24,189
21.3%
2017
11,286
1,996
7,742
743
21,767
32.1%
51,252
11,568
62,820
7,838
3,608
1,431
1,211
1,604
2,296
1,999
2,010
2,311
2,066
2,009
1,700
1,934
1,164
10,820
106,821
2016
12,827
1,679
16
102
14,624
34.7%
66
Table 7 Distribution of Assets and Liabilities
2018
As of December 31,
2017
2016
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
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 $100,000 or more
Other time deposits
Total deposits
Borrowings
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
72%
9
2
7
90
1
2
4
−
2
1
100%
22%
16
18
7
12
4
79
7
1
87
13
100%
73%
6
2
7
88
2
2
5
−
2
1
100%
22%
16
18
8
11
5
80
7
1
88
12
100%
74%
6
4
6
90
2
2
2
−
2
2
100%
21%
17
19
6
12
7
82
7
1
90
10
100%
Table 8 Securities Portfolio Composition
($ 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
2018
$ 82,662
385,551
33,138
−
501,351
52,048
49,189
101,237
Total securities
$ 602,588
As of December 31,
2017
13,867
295,213
34,190
−
343,270
63,829
54,674
118,503
461,773
2016
17,490
148,065
33,600
174
199,329
80,585
49,128
129,713
329,042
Average total securities during year
$ 470,301
358,957
348,069
67
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 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 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,
2018
Book
Value
Fair
Value
Book
Yield (1)
$ 82,995
82,995
89,498
232,251
75,246
396,995
26,210
2,541
5,000
33,751
198,703
234,792
80,246
$ 513,741
$ 41,550
10,498
52,048
2,233
28,488
16,743
1,725
49,189
2,233
70,038
27,241
1,725
$ 101,237
82,662
82,662
85,693
224,996
74,862
385,551
25,641
2,559
4,938
33,138
193,996
227,555
79,800
501,351
40,081
10,160
50,241
2,240
28,766
16,932
1,727
49,665
2,240
68,847
27,092
1,727
99,906
2.97%
2.97%
2.53%
2.75%
3.13%
2.77%
3.27%
5.40%
5.82%
3.81%
2.81%
2.78%
3.30%
2.87%
2.20%
2.60%
2.28%
4.59%
4.20%
3.96%
3.23%
4.10%
4.59%
3.01%
3.44%
3.23%
3.17%
___________________________________
(1) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 23.37% tax rate.
(2) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.
68
Table 10 Loan Portfolio Composition
($ 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
As of December 31,
2018
2017
2016
2015
2014
% of
Total
Loans
Amount
% of
Total
Loans
Amount
% of
Total
Loans
Amount
Amount
% of
Total
Loans
Amount
% of
Total
Loans
$ 457,037
11%
$ 381,130
10%
$ 261,813
9%
$ 202,671
8%
$ 160,878
7%
518,976
12%
539,020
13%
354,667
13%
308,969
12%
288,148
12%
1,054,176
25%
972,772
24%
750,679
28%
768,559
31%
789,871
33%
359,162
8%
379,978
9%
239,105
9%
232,601
9%
223,500
9%
1,787,022
42%
1,696,107
42%
1,049,460
39%
957,587
38%
882,127
37%
71,392
4,247,765
2%
100%
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%
Unamortized net deferred
loan costs (fees)
Total loans
1,299
4,249,064
(986)
4,042,369
(49)
2,710,712
873
2,518,926
946
2,396,174
69
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, 2018
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
$ 76,579
60,500
103,475
6.02%
6.26%
5.96%
$ 34,382
109,327
180,041
5.79%
5.47%
5.80%
$ 43,606
12,507
470,662
7.55%
5.29%
4.94%
$ 154,567
182,334
754,178
6.40%
5.72%
5.29%
11,329
5.55%
78,422
5.48%
253,646
5.44%
343,397
5.45%
3,524
255,407
6.46%
6.04%
30,130
432,302
9.12%
5.89%
2,647
783,068
7.61%
5.26%
36,301
1,470,777
8.75%
5.58%
21,147
88,781
177,754
2,773
290,455
545,862
22,575
$ 568,437
4.82%
4.14%
4.99%
5.13%
4.72%
5.34%
119,692
60,770
1,197,016
25,105
1,402,583
1,834,885
−
$ 1,834,885
4.53%
4.51%
4.62%
5.35%
4.62%
4.92%
167,429
56,161
830,586
8,498
1,062,674
1,845,742
−
$ 1,845,742
3.46%
4.40%
4.42%
10.22%
4.31%
4.71%
308,268
205,712
2,205,356
36,376
2,755,712
4,226,489
22,575
$ 4,249,064
3.97%
4.32%
4.57%
6.47%
4.51%
4.88%
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
70
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
2018
2017
As of December 31,
2016
2015
2014
$ 22,575
13,418
−
35,993
−
7,440
$ 43,433
20,968
19,834
−
40,802
−
12,571
53,373
27,468
22,138
−
49,606
−
9,532
59,138
39,994
28,011
−
68,005
−
9,188
77,193
50,066
35,493
−
85,559
−
9,771
95,330
Purchased credit impaired loans not included above (2)
$ 17,393
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
−
11,294
806
12,100
10,508
5,823
−
16,331
2,350
18,681
Total nonperforming assets
$ 43,433
53,373
59,138
89,293
114,011
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
0.85%
1.02%
0.74%
0.85%
1.02%
0.74%
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%
4.25%
4.73%
3.54%
2.81%
3.77%
3.18%
4.18%
2.37%
3.09%
(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 $9.9 million, respectively, in purchased credit impaired loans in accordance with ASC 310-30 accounting guidance. These loans are
excluded from the nonperforming loan amounts.
(2)
71
Table 12a Nonperforming Assets by Geographical Region
($ 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, 2018
Total Nonperforming
Loans
Total Loans
Nonperforming Loans to
Total Loans
$ 9,042
9,360
5,919
768
6,100
554
1,378
–
2,872
$ 884,000
904,000
865,000
332,000
264,000
679,000
160,000
2,000
159,000
1.02%
1.04%
0.68%
0.23%
2.31%
0.08%
0.86%
0.00%
1.81%
$ 35,993
$ 4,249,000
0.85%
$ 1,748
1,179
843
180
698
1,272
496
1,024
–
$ 7,440
_____________________________
(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
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg
Southern Piedmont North Carolina Region - 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
Other includes loans originated on a national basis through the Company’s SBA Lending Division
72
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)
_____________________
2018
2017
As of December 31,
2016
2015
2014
$ 2,889
2,243
14,845
952
20,929
110
$ 21,039
3,111
2,816
14,449
950
21,326
1,972
23,298
3,829
2,691
4,764
3,790
6,911
8,520
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
$ −
̶
̶
1,799
2,281
(1) During 2016, all FDIC loss share agreements were terminated, and accordingly, there were no covered loans at December 31, 2018, 2017 and
2016.
73
Table 14 Loan Loss and Recovery Experience
($ in thousands)
2018
2017
As of December 31,
2016
2015
2014
Loans outstanding at end of year
$ 4,249,064
4,042,369
2,710,712
2,518,926
2,396,174
Average amount of loans outstanding
$ 4,161,838
3,420,939
2,603,327
2,434,602
2,434,331
Allowance for loan losses, at
beginning of year
Provision (reversal) 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 recoveries (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 (recoveries) as a percent of average
loans
Allowance for loan losses as a percent of loans at end
of year
Allowance for loan losses as a multiple of net charge-
offs
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
$ 23,298
(3,589)
−
(3,589)
19,709
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
(2,128)
(1,622)
(158)
(1,734)
(711)
(1,459)
(781)
(6,971)
1,195
4,097
833
364
1,503
309
8,301
1,330
−
$ 21,039
(589)
(2,641)
(978)
(1,182)
(799)
(7,811)
1,311
2,579
1,076
333
1,027
279
6,605
(1,206)
−
23,298
(2,033)
(1,101)
(3,894)
(1,010)
(1,088)
(1,288)
(10,414)
817
2,690
1,207
(3,039)
(5,179)
(3,616)
(6,071)
(5,145)
(4,050)
(1,117)
(3,103)
(2,411)
(18,431)
934
3,599
678
(1,607)
(4,405)
(1,924)
(23,236)
149
3,363
646
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
$ −
−
1,714
2,306
(3,332)
(0.03%)
0.50%
n/m
n/m
0.04%
0.58%
19.32x
0.14%
0.88%
6.38x
0.46%
1.13%
2.54x
0.74%
1.70%
2.25x
59.95%
(0.62%)
(6.93%)
56.41%
119.08%
84.56%
64.19%
38.89%
22.22%
(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.
n/m – not meaningful
74
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
2018
Year Ended December 31,
2017
2016
Average
Amount
Average
Rate
Average
Amount
Average
Rate
Average
Amount
Average
Rate
$ 875,751
1,023,162
439,880
641,516
275,904
3,256,213
1,260,598
4,516,811
0.10% $ 722,286
825,015
0.32%
385,967
0.21%
504,349
1.30%
0.38%
261,910
2,699,527
0.45%
−
997,203
0.32%
3,696,730
0.07% $ 583,786
657,211
0.19%
200,093
0.19%
405,220
0.79%
0.30%
268,854
2,115,164
0.28%
−
712,349
0.20%
2,827,513
0.06%
0.18%
0.05%
0.65%
0.33%
0.24%
−
0.18%
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, 2018
Over 6 to 12
Months
Over 12
Months
Total
Time deposits of $100,000 or more
$ 175,032
174,359
204,638
136,893
690,922
75
Table 17 Interest Rate Sensitivity Analysis
Percent of total earning assets
Cumulative percent of total earning assets
33.41%
33.41%
($ 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, 2018
Total Within
12 Months
Over 3 to 12
Months
Over 12
Months
3 Months
or Less
$ 1,300,310
34,764
11,985
411,127
$ 1,758,186
$ 916,374
1,035,523
432,389
175,032
77,479
309,704
$ 2,946,501
233,384
86,594
19,264
−
339,242
6.45%
39.85%
−
−
−
378,997
122,030
50,000
551,027
1,533,694
121,358
31,249
411,127
2,097,428
39.85%
39.85%
916,374
1,035,523
432,389
554,029
199,509
359,704
3,497,528
2,715,370
379,993
69,988
−
3,165,351
60.15%
100.00%
−
−
−
136,893
64,491
46,905
248,289
Total
4,249,064
501,351
101,237
411,127
5,262,779
100.00%
100.00%
916,374
1,035,523
432,389
690,922
264,000
406,609
3,745,817
78.66%
14.71%
93.37%
6.63%
100.00%
78.66%
93.37%
93.37%
100.00%
100.00%
$ (1,188,315)
(1,188,315)
(211,785)
(1,400,100)
(1,400,100)
(1,400,100)
2,917,062
1,516,962
1,516,962
1,516,962
(22.58%)
(26.60%)
(26.60%)
28.82%
28.82%
59.67%
59.97%
59.67%
140.50%
140.50%
____________________________________
(1) The three months or less category for loans includes $31,296 in adjustable rate loans that are at their contractual rate floors, and approximately
$11,604 will reprice higher within the next 100 basis points of increases in the prime rate.
(2) Securities available for sale include government-sponsored enterprise securities, mortgage-backed securities, and corporate bonds. Securities held to
maturity include mortgage-backed securities and state and local government securities. For fixed rate mortgage-backed securities, the principal is
assumed to reprice equally over the average life of the underlying security. All other fixed rate securities are assumed to reprice based on maturity
date or call date. Variable rate securities are included in the period in which they are subject to reprice.
76
Table 18 Contractual Obligations and Other Commercial Commitments
Contractual
Obligations
As of December 31, 2018
Borrowings
Operating leases
Total contractual cash obligations,
excluding deposits
Deposits
Total contractual cash obligations,
including deposits
Payments Due by Period ($ in thousands)
On Demand or
Less
than 1 Year
1-3 Years
4-5 Years
303,000
2,268
40,000
3,317
1,275
1,637
After 5 Years
62,334
4,082
Total
$ 406,609
11,304
417,913
305,268
43,317
2,912
66,416
4,659,339
4,457,954
165,706
34,862
817
$ 5,077,252
4,763,222
209,023
37,774
67,233
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial
Commitments
As of December 31, 2018
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
Total
Amounts
Committed
$ 123,707
1,165,087
15,705
$ 1,304,499
Less
than 1 Year
1-3 Years
4-5 Years
After 5 Years
61,854
468,433
15,303
545,590
61,853
218,423
400
280,676
150,668
2
150,670
327,563
−
327,563
77
Table 19 Market Risk Sensitive Instruments
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2018 Occurring in Indicated Year
($ in thousands)
2019
2020
2021
2022
2023
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
$ 406,848
4,279
−
−
−
−
−
−
−
−
−
−
406,848
2.37%
$ 406,848
4,279
4.41%
4,279
151,015
290,455
255,406
$ 1,108,003
91,013
218,660
107,053
416,726
81,117
299,049
118,326
498,492
91,127
445,146
105,520
641,793
88,024
439,727
101,404
629,155
112,682
1,062,675
783,068
1,958,425
614,978
2,755,712
1,470,777
5,252,594
2.92%
4.51%
5.58%
4.46%
601,257
2,721,947
1,457,655
$ 5,191,986
$ 916,374
1,035,523
432,389
753,537
303,000
−
$ 3,440,823
−
−
−
117,229
40,000
–
157,229
−
−
−
48,477
−
–
48,477
−
−
−
21,726
−
–
21,726
−
−
−
13,136
1,275
–
14,411
−
−
−
817
8,432
53,902
63,151
916,374
1,035,523
432,389
954,922
352,707
53,902
3,745,817
0.11%
0.48%
0.26%
1.39%
2.35%
4.60%
0.83%
$ 916,374
1,035,523
432,389
949,105
351,990
50,566
$ 3,735,947
______________________
(1) Tax-exempt securities are reflected at a tax-equivalent basis using a 23.37% tax rate.
(2) Securities with call dates within 12 months of December 31, 2018 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
2018
For the Year Ended December 31,
2017
2016
Return on average assets
Return on average common equity
Dividend payout ratio – common shares
Average shareholders’ equity to average assets
1.57%
12.27%
13.25%
12.78%
1.00%
8.62%
17.58%
11.61%
0.80%
7.73%
23.36%
10.54%
78
Table 21 Risk-Based and Leverage Capital Ratios
($ in thousands)
Risk-Based and Leverage Capital
Common Equity Tier I capital:
Shareholders’ equity
Intangible assets, net of deferred tax liability
Accumulated other comprehensive income
adjustments
Total Common Equity Tier I capital
Tier I capital:
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
2018
As of December 31,
2017
2016
$ 764,230
(240,625)
−
535,566
52,198
−
587,764
21,039
625
21,664
$ 609,428
692,979
(240,299)
4,146
456,826
52,054
(89)
508,791
23,298
818
24,116
532,907
368,101
(64,496)
5,107
308,712
45,000
(349)
353,363
23,781
703
24,484
377,847
Total risk weighted assets
$ 4,361,238
4,262,941
2,828,118
Adjusted fourth quarter average assets
$ 5,612,092
5,314,246
3,474,518
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
12.28%
6.375%
7.00%
13.48%
7.875%
8.50%
13.97%
9.875%
10.50%
10.47%
4.00%
4.00%
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%
79
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 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
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
2018
2017
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$ 61,635
7,346
54,289
443
53,846
693
53,153
14,406
37,666
29,893
5,998
58,647
6,374
52,273
428
51,845
87
51,758
15,376
39,238
27,896
5,905
57,102
5,503
51,599
367
51,232
(710)
51,942
16,111
38,873
29,180
6,450
55,417
4,554
50,863
356
50,507
(3,659)
54,166
15,941
43,598
26,509
5,836
53,686
4,216
49,470
610
48,860
̶
48,860
14,862
43,617
20,105
5,928
45,713
3,372
42,341
702
41,639
̶
41,639
12,362
34,384
19,617
6,531
43,520
2,911
40,609
693
39,916
̶
39,916
11,875
35,084
16,707
5,553
37,053
2,172
34,881
585
34,296
723
33,573
9,809
32,072
11,310
3,755
23,895
21,991
22,730
20,673
14,177
13,086
11,154
7,555
$ 0.81
0.80
0.10
41.74
30.50
32.66
25.71
17.18
0.74
0.74
0.10
43.14
39.32
40.51
24.99
16.43
0.77
0.77
0.10
42.94
34.70
40.91
24.20
15.79
0.70
0.70
0.10
37.85
33.88
35.65
23.79
15.17
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
31.31
26.47
29.29
19.85
13.53
$ 5,840,964
4,222,417
5,238,827
4,264,868
3,697,076
754,734
5,712,940
4,191,751
5,105,981
4,526,012
3,654,176
737,560
5,671,620
4,133,689
5,042,904
4,512,559
3,671,692
717,975
5,549,516
4,099,495
4,917,628
4,403,805
3,629,364
701,411
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
1.62%
12.56%
13.03%
9.07 %
91.30%
1.53%
11.83%
13.01%
8.95%
92.60%
1.61%
12.70%
12.68%
8.59%
91.60%
1.51%
11.95%
12.51%
8.35%
93.09%
1.01%
8.04%
12.49%
8.23%
92.20%
1.15%
9.98%
11.16%
7.95%
93.74%
1.01%
9.01%
11.06%
7.98%
92.15%
0.79%
7.18%
11.02%
7.79%
92.09%
141.70%
4.11%
0.50%
139.73%
4.06%
0.49%
137.35%
4.10%
0.56%
135.50%
4.19%
0.57%
135.41%
4.01%
0.58%
136.58%
4.16%
0.72%
135.51%
4.08%
0.71%
134.78%
4.07%
0.72%
loans
0.85%
0.83%
1.03%
0.98%
1.01%
1.27%
1.30%
1.44%
Nonperforming assets as a percent of
total assets
Net charge-offs (recoveries) as a percent
0.74%
0.72%
0.90%
0.92%
0.96%
1.16%
1.21%
1.35%
of average total loans
0.02%
0.27%
(0.07%)
(0.36%)
0.13%
(0.07%)
(0.06%)
0.13%
80
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2018 and 2017
($ 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 $99,906 in 2018 and $118,998 in 2017)
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)
2018
2017
$ 56,050
406,848
462,898
501,351
101,237
4,279
4,249,064
(21,039)
4,228,025
119,000
16,004
234,368
21,112
7,440
101,878
66,524
$ 5,864,116
$ 1,320,131
916,374
1,035,523
432,389
690,922
264,000
4,659,339
406,609
1,976
31,962
5,099,886
114,301
375,189
489,490
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
Shareholders’ Equity
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued & outstanding: none in 2018 and 2017
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 29,724,874 shares in 2018 and 29,639,374 shares in 2017
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.
−
−
434,453
341,738
(3,235)
3,235
(11,961)
764,230
$ 5,864,116
432,794
264,331
(3,581)
3,581
(4,146)
692,979
5,547,037
81
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2018, 2017 and 2016
($ 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 (reversal) 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
2018
2017
2016
$ 208,609
163,738
121,322
10,638
1,482
10,478
231,207
5,074
8,356
1,061
9,286
23,777
207,430
(3,589)
−
(3,589)
211,019
12,690
19,945
2,735
8,731
4,675
10,366
2,534
(565)
−
−
−
723
61,834
75,077
16,888
91,965
10,793
5,627
2,358
6,763
41,869
159,375
113,478
24,189
89,289
−
7,007
1,677
4,960
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
15,313
82,099
9,661
4,480
8,073
4,240
36,604
145,157
67,739
21,767
6,162
1,748
1,755
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
11,568
62,820
7,838
3,608
1,431
1,211
29,913
106,821
42,133
14,624
45,972
27,509
−
(175)
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.
82
$ 89,289
45,972
27,334
$ 3.02
3.01
$ 0.40
1.82
1.82
1.37
1.33
0.32
0.32
29,566,259
29,707,431
25,210,606
25,291,382
19,964,727
20,732,917
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2018, 2017 and 2016
($ in thousands)
2018
2017
2016
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)
$ 89,289
45,972
27,509
(10,179)
2,379
−
−
(41)
10
21
(5)
(7,815)
639
(234)
235
(87)
1,601
(593)
211
(75)
1,697
(1,919)
683
(3)
1
(557)
115
202
(79)
(1,557)
Comprehensive income
$ 81,474
47,669
25,952
See accompanying notes to consolidated financial statements.
83
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2018, 2017 and 2016
($ 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, 2016
$ 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
Net income
Cash dividends declared ($0.40 per
common share)
Payment of deferred fees
Stock option exercises
Stock withheld for payment of taxes
Stock-based compensation
Other comprehensive income (loss)
89,289
(11,882)
346
(346)
89,289
(11,882)
−
324
(406)
1,741
(7,815)
(7,815)
25
(11)
72
324
(406)
1,741
Balances, December 31, 2018
$ ̶
29,725
$ 434,453
341,738
(3,235)
3,235
(11,961)
764,230
See accompanying notes to consolidated financial statements.
84
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2018, 2017 and 2016
($ 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 (increase) 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
Net increase in loans
Payments 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 (decrease) in borrowings
Cash dividends paid – common stock
Cash dividends paid – preferred stock
Proceeds from stock option exercises
Stock withheld for payment of taxes
Net cash provided by financing activities
Increase (decrease) 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.
85
2018
2017
2016
$ 89,289
45,972
27,509
(3,589)
2,749
(7,812)
(190)
−
565
−
(723)
(2,285)
6,077
1,569
6,763
(13,101)
(118,791)
129,519
(196,784)
157,427
−
(1,910)
3,525
741
(6,629)
46,410
(230,794)
−
60,871
16,183
−
(6,129)
(152,972)
−
−
7,532
(10,723)
2,753
−
−
(313,279)
252,756
(1,116)
(11,281)
−
324
(406)
240,277
(26,592)
489,490
$ 462,898
23,036
21,162
4,148
(7,800)
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
183,497
305,993
489,490
12,239
19,537
5,452
553
(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
38,725
267,268
305,993
7,653
11,791
8,117
(1,238)
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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 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 2018 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.
86
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 substantially 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
87
nonaccrual status, the Company’s policy is that all cash receipts are applied to principal. Once the recorded principal
balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously charged
off. Further cash receipts are recorded as interest income to the extent that any interest has been foregone. Loans
are removed from nonaccrual status when they become current as to both principal and interest, when concern no
longer exists as to the collectability of principal or interest, and when the loan has provided generally six months of
satisfactory payment performance. In some cases, where borrowers are experiencing financial difficulties, loans may
be restructured to provide terms significantly different from the originally contracted terms. For a nonaccrual loan
that has been restructured, if the borrower has six months of satisfactory performance under the restructured terms
and it is reasonably assured that the borrower will continue to be able to comply with the restructured terms, the
loan may be returned to accruing status. The nonaccrual policy discussed above applies to all loan classifications.
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) SBA Loan Originations – Beginning in 2016, through its SBA Lending Division, the Company began offering 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, 2018 and 2017. The Company generally sells the guaranteed portion of the SBA loan soon
after origination and retains the servicing right. When the guaranteed portion of an SBA loan is sold, the Company
allocates the carrying basis between the guaranteed portion of the loan sold, the unguaranteed portion of the loans
retained, and the servicing asset based on their relative fair values. A gain is recorded for the difference between the
proceeds received from the sale and the basis allocated to the sold portion. The servicing asset is included in “Other
intangible assets” and is amortized as expense over the life of the loan. Servicing assets are aggregated by year of
origination and tested for impairment on a quarterly basis. Servicing fees collected are recorded as noninterest
income. The relative fair value allocation also results in a discount that is recorded on the unguaranteed portion of
the loan that is retained. This discount is amortized as a yield adjustment over the life of the loan, so long as the loan
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performs. In the event of default, the remaining discount is available to offset the write-off of the remaining servicing
asset and deferred origination costs, with any remaining discount available to offset any loan charge-off.
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, 2018 or 2017.
(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
89
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
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, 2018 and 2017, the Company’s investments in limited partnerships, LLCs and other privately held
companies totaled $7.5 million and $5.3 million, respectively, and were included in other assets.
(p) Stock Option Plan − At December 31, 2018, 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, 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
90
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 contingently issuable shares, the
number of shares that are included in the calculation of dilutive securities is based on the number of shares that are
issuable if the end of the reporting period were the end of the contingency period. As it relates to the Series C
Preferred Stock for the period of time it was outstanding, it is assumed that the preferred stock was converted to
common stock at the beginning of the reporting period. Dividends on the preferred stock are added back to net
income in 2016 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)
2018
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2017
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
2016
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
$ 89,289
29,566,259
$ 3.02
$ 45,972
25,210,606
$ 1.82
$ 27,334
19,964,727
$ 1.37
−
141,172
-
80,776
175
768,190
$ 89,289
29,707,431
$ 3.01
$ 45,972
25,291,382
$ 1.82
$ 27,509
20,732,917
$ 1.33
For the years ended December 31, 2018 and 2017, there were no options that were anti-dilutive. For the year ended
December 31, 2016, there were 5,000 options that were anti-dilutive because the exercise price exceeded the
average market price for the year, and thus are not included in the calculation to determine the effect of dilutive
securities.
(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 determined assuming the sale of the notes to a third-party financial
investor. 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 with a
liquidity discount offered on loans with similar risk characteristics, and includes the Company’s estimate of future
credit losses expected to be incurred over the life of the loan. 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.
91
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.
SBA Servicing Asset – The fair value of the Company’s SBA servicing asset is estimated based on the present value of
the discounted cash flows of the expected servicing income less the estimated cost to service the loans.
Deposits − The fair value of deposits with no stated maturity, such as noninterest-bearing checking accounts, savings
accounts, interest-bearing checking accounts, and money market accounts, is equal to the amount payable on
demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently offered in the marketplace for
deposits of similar remaining maturities.
Borrowings − The fair value of borrowings is based on the discounted value of the contractual cash flows. The
discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar maturities.
Commitments to Extend Credit and Standby Letters of Credit − At December 31, 2018 and 2017, 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.
92
(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,
2018
$ (12,390)
2,896
(9,494)
December 31,
2017
(2,211)
517
(1,694)
December 31,
2016
(3,085)
1,138
(1,947)
(3,220)
753
(2,467)
(3,200)
748
(2,452)
(5,012)
1,852
(3,160)
Total accumulated other comprehensive income (loss)
$ (11,961)
(4,146)
(5,107)
The following table discloses the changes in accumulated other comprehensive income (loss) for the years ended
December 31, 2018, 2017, and 2016 (all amounts are net of tax).
($ in thousands)
Beginning balance at January 1, 2016
Unrealized Gain
(Loss) on Securities
Available for Sale
$ (709)
Additional
Pension Asset
(Liability)
(2,841)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income
Net current-period other comprehensive income (loss)
(1,236)
(2)
(1,238)
(442)
123
(319)
Total
(3,550)
(1,678)
121
(1,557)
Ending balance at December 31, 2016
(1,947)
(3,160)
(5,107)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income
Net current-period other comprehensive income (loss)
Reclassification of accumulated other comprehensive income to
retained earnings due to statutory tax changes
405
148
553
(300)
1,008
136
1,144
1,413
284
1,697
(436)
(736)
Ending balance at December 31, 2017
(1,694)
(2,452)
(4,146)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income
Net current-period other comprehensive income (loss)
(7,800)
−
(7,800)
(31)
16
(15)
(7,831)
16
(7,815)
Ending balance at December 31, 2018
$ (9,494)
(2,467)
(11,961)
(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.
93
(v) Recent Accounting Pronouncements −
Accounting Standards Adopted in 2018
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of
revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize
revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity
receives or expects to receive. The 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
were not affected. The guidance was effective for the Company on January 1, 2018 and the Company adopted the
guidance using the modified retrospective method. The adoption did not have a material effect on the Company’s
financial statements. See Note 20 for additional information on this matter.
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 were effective for the Company on January 1, 2018 and the adoption of the guidance
did not 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 were effective for the Company on January 1, 2018 and did not 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 were effective for the Company on January 1, 2018 and did not have a material effect on its financial
statements. The Company presents the service cost component within the “Employee benefits” line item and the
other components of net periodic pension costs are presented within the “Other operating expenses” line item. The
Company has reclassified amounts in the Consolidated Statements of Income for the years ended December 31, 2017
and December 31, 2016 to be consistent with the presentation required for December 31, 2018.
In February 2018, the FASB issued guidance related to the Income Statement – Reporting Comprehensive Income
topic of the Accounting Standards Codification, 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, and reclassified $0.7 million between
Accumulated Other Comprehensive Income and Retained Earnings.
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Accounting Standards Pending Adoption
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 currently expects that the adoption of the guidance will have no impact on net income and will result in
the recording of approximately $18 million of additional assets and liabilities. Accordingly, the Company does not
expect these amendments to have a material effect on its financial statements or regulatory capital position.
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 guidance 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 continues its
ongoing analysis on the impact of this guidance on its consolidated financial statements. As required by the guidance,
the initial adjustment will be recorded by decreasing shareholders’ equity and not through an earnings adjustment.
All subsequent adjustments will be recorded in earnings.
In January 2017, the FASB 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 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
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 June 2018, the FASB amended the Compensation—Stock Compensation Topic of the Accounting Standards
Codification. The amendments expand the scope of this Topic to include share-based payment transactions for
acquiring goods and services from nonemployees. The amendments are effective for fiscal years beginning after
December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than
an entity’s adoption date of the Revenue from Contracts with Customers Topic. The Company does not expect these
amendments to have a material effect on its financial statements.
In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The
amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB
Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The
amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon
issuance of this guidance and delay adoption of the additional disclosures until their effective date. The Company
does not expect these amendments to have a material effect on its financial statements.
95
In August 2018, the FASB amended the Compensation - Retirement Benefits – Defined Benefit Plans Topic of the
Accounting Standards Codification to improve disclosure requirements for employers that sponsor defined benefit
pension and other postretirement plans. The guidance removes disclosures that are no longer considered cost-
beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant.
The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2020. Early adoption is permitted. The Company does not expect these amendments to have a
material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not
expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 2. Acquisitions
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 transaction value was $2.2 million 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 was 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 specializes in consulting with financial institutions across the country related to Small Business
Administration (“SBA”) loan origination and servicing. The transaction 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 acquisition agreement, the Company recorded an
earn-out liability initially valued at $3.0 million, which will be paid in shares of Company stock if pre-
determined goals are met for the first three years following the acquisition.
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, were 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. Subsequent to the measurement period, later in 2017, the
Company recorded a $780,000 upward adjustment to the earn-out liability with a charge to earnings. In
96
2018, a net downward adjustment of $32,000 was recorded to the earn-out liability with a positive credit to
earnings.
(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 this 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 was 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’s subsidiary bank was a North Carolina state-chartered bank with eight 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 complemented the Company’s expansion
into several of these high-growth markets and increased 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 was able to change its valuations of acquired Carolina Bank assets and
liabilities for up to one year after the acquisition date by recording measurement period adjustments. 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 $66.5 million in goodwill that resulted from this transaction is non-deductible
for tax purposes.
97
($ 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)
−
757
1,624
−
(262)
(444)
(706)
(l)
(m)
(n)
(o)
(p)
$ 114,478
25,279
81,464
49,368
497,522
̶
21,899
8,790
30,929
689,972
585,381
18,738
12,636
616,755
73,217
139,757
$ 66,540
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 is being
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
securities was less than the current interest rate on similar instruments. This amount is being amortized on
approximately a straight-line basis to increase interest expense over the remaining life of the related
borrowing, which is 18 years.
(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.
98
(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 based on newly obtained valuations.
(o) This fair value adjustment relates to miscellaneous adjustments to decrease the initial fair value of
borrowings.
(p) This fair value adjustment related to a change in the estimate of a contingent liability.
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
each included 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, and
represented an opportunity to complement the Company’s 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,
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 acquisition agreement, the Company also recorded an
earn-out liability initially 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.
(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.
99
Asheville Savings Bank’s subsidiary bank was a North Carolina state-chartered savings bank with eight
branches located in Buncombe County, North Carolina and five branches located in the counties of Henderson,
Madison, McDowell and Transylvania, all in North Carolina. The acquisition complemented 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 was able to change its valuations of acquired Asheville Savings Bank
assets and liabilities for up to one year after the acquisition date by recording measurement period
adjustments. 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 $88.7 million in goodwill that resulted
from this transaction is non-deductible for tax purposes.
($ in thousands)
Assets
Cash and cash equivalents
Securities
Loans, gross
Allowance for loan losses
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
As Recorded by
Asheville Savings
Bank
Initial Fair
Value
Adjustments
Measurement
Period
Adjustments
As
Recorded by
First Bancorp
$ 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)
−
−
−
−
−
−
−
120
(777)
(657)
−
−
(380)
(380)
(i)
(j)
(k)
$ 169,299
17,939
41,824
95,020
606,180
̶
3,785
20,554
9,880
29,316
806,559
679,137
20,000
8,861
707,998
98,561
187,238
$ 88,677
Goodwill recorded related to acquisition of Asheville Savings Bank
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.
100
(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 is being 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 is being 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.
(i) This fair value adjustment relates to a change in the final amount of the core deposit intangible asset from
the amount originally estimated.
(j) This fair value adjustment relates to the write-down of a foreclosed property based on an updated appraisal
and the related tax deferred tax asset adjustment.
(k) This fair value adjustment was recorded to adjust the tax liability assumed on the acquisition date based on
updated information.
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 $20.4 million of merger-related expenses that were recorded by Asheville Savings Bank in 2017 prior
to the merger date are each included above in the pro forma presentation for 2016.
101
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2018 and 2017 are
summarized as follows:
($ in thousands)
Securities available for sale:
Government-sponsored
enterprise securities
Mortgage-backed securities
Corporate bonds
Total available for sale
Securities held to maturity:
Mortgage-backed securities
State and local governments
Total held to maturity
2018
2017
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
$ 82,995
396,995
33,751
513,741
82,662
385,551
33,138
501,351
52,048
49,189
$ 101,237
50,241
49,665
99,906
63
39
76
178
−
525
525
(396)
(11,483)
(689)
(12,568)
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)
(1,807)
(49)
(1,856)
63,829
54,674
118,503
63,092
55,906
118,998
−
1,280
1,280
(737)
(48)
(785)
All of the Company’s mortgage-backed securities were issued by government-sponsored corporations, except for
private mortgage-backed securities with a fair value of $1.0 million and $0.5 million as of December 31, 2018 and
2017, respectively.
The following table presents information regarding securities with unrealized losses at December 31, 2018:
($ 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
$ 4,921
82,525
20,704
595
$ 108,745
78
351
433
1
863
13,682
294,305
5,817
6,641
320,445
318
12,939
256
48
13,561
18,603
376,830
26,521
7,236
429,190
396
13,290
689
49
14,424
The following table presents information regarding securities with unrealized losses at December 31, 2017:
($ in thousands)
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
State and local governments
Total temporarily impaired securities
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
$ 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
In the above tables, all of the securities that were in an unrealized loss position at December 31, 2018 and 2017 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 evaluated the collectability of each of these bonds and concluded that there was no
102
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 book values and approximate fair values of investment securities at December 31, 2018, 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
Securities Available for Sale
Amortized
Cost
Fair
Value
Securities Held to Maturity
Amortized
Cost
Fair
Value
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 securities
$ −
109,205
2,541
5,000
396,995
$ 513,741
−
108,303
2,559
4,938
385,551
501,351
$ 2,233
28,488
16,743
1,725
52,048
$ 101,237
2,240
28,766
16,932
1,727
50,241
99,906
At December 31, 2018 and 2017, investment securities with carrying values of $234,382,000 and $176,813,000,
respectively, were pledged as collateral for public deposits.
The Company sold no securities in 2018, while 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.
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 $37,468,000 and $31,338,000 at
December 31, 2018 and 2017, respectively. The FHLB stock had a cost and fair value of $20,036,000 and $19,647,000
at December 31, 2018 and 2017, 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
$17,432,000 and $11,691,000 at December 31, 2018 and 2017, 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.
The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public
offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain
litigation against Visa. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is
periodically adjusted as Visa settles litigation. The conversion rate at December 31, 2018 was approximately 1.63,
which means the Company would receive approximately 20,140 Class A shares if the stock had converted on that
date. This stock does not have a readily determinable fair value and is therefore carried at its cost basis of zero. If a
readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the
Company will adjust the carrying value of the stock to its market value with a credit to earnings.
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 began
to be borne solely by First Bank.
103
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, $19.3 million were
considered to be purchased credit impaired (“PCI”) loans, which are loans for which it is probable at acquisition date
that all contractually required payments will not be collected. The remaining loans were considered to be purchased
non-impaired loans and their related fair value discount or premium is being recognized as an adjustment to yield
over the remaining life of each loan.
The following table relates to acquired Carolina Bank PCI loans and summarizes the contractually required payments,
which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at
the acquisition date.
($ 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, $9.9 million were
considered to be PCI loans. The remaining loans were considered to be purchased non-impaired loans and their
related fair value discount or premium is being recognized as an adjustment to yield over the remaining life of each
loan.
The following table relates to acquired Asheville Savings Bank PCI loans and summarizes the contractually required
payments, which includes principal and interest, expected cash flows to be collected, and the fair value of acquired
PCI loans at the acquisition date.
($ 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
104
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, 2018
December 31, 2017
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 /
$ 457,037
11%
$ 381,130
518,976
1,054,176
12%
25%
539,020
972,772
lines of credit
359,162
8%
379,978
Real estate – mortgage – commercial and
other
Installment loans to individuals
Subtotal
Unamortized net deferred loan costs (fees)
Total loans
1,787,022
71,392
4,247,765
1,299
$ 4,249,064
42%
2%
100%
1,696,107
74,348
4,043,355
(986)
$ 4,042,369
10%
13%
24%
9%
42%
2%
100%
Loans in the amount of $3.8 billion and $3.6 billion were pledged as collateral for certain borrowings as of December
31, 2018 and December 31, 2017, respectively (see Note 10).
The loans above also include loans to executive officers and directors serving the Company at December 31, 2018 and
to their associates, totaling approximately $5.7 million and $3.6 million at December 31, 2018 and 2017, respectively.
During 2018, net advances on such loans were approximately $2.1 million. These loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions
with other non-related borrowers. Management does not believe these loans involve more than the normal risk of
collectability or present other unfavorable features.
At December 31, 2018 and 2017, there was a remaining unaccreted discount on the retained portion of sold SBA
loans amounting to $5.7 million and $2.6 million, respectively. As of December 31, 2018 and 2017, there was a
remaining accretable discount of $15.0 million and $21.5 million, respectively, related to purchased non-impaired
loans. Both types of discounts are amortized as yield adjustments over the respective lives of the loans, so long as the
loans perform.
105
The following table presents changes in the carrying value of PCI loans.
($ 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,
2018
$ 23,165
−
−
(5,799)
(10)
(4)
41
$ 17,393
For the Year
Ended
December 31,
2017
514
19,254
9,886
(6,016)
(12)
(69)
(392)
23,165
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,
2018
$ 4,688
−
−
(2,050)
849
1,263
$ 4,750
For the Year
Ended
December 31,
2017
−
3,617
1,804
(1,846)
423
690
4,688
During 2018, the Company received $772,000 in payments that exceeded the carrying amount of the related PCI
loans, of which $493,000 was recognized as loan discount accretion income and $279,000 was recorded as additional
loan interest income. During 2017, the Company received $1,064,000 in payments that exceeded the carrying
amount of the related PCI loans, of which $962,000 was recognized as loan discount accretion income and $102,000
was recorded as additional loan interest income.
During 2018, the Company recorded $750,000 in interest recoveries on purchased non-impaired loans. Amounts
recorded for 2016 and 2017 were not significant.
Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still
accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows:
ASSET QUALITY DATA ($ 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,
2018
December 31,
2017
$ 22,575
13,418
−
35,993
7,440
$ 43,433
20,968
19,834
−
40,802
12,571
53,373
Purchased credit impaired loans not included above (1)
$ 17,393
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
and $0.6 million in PCI loans at December 31, 2018 and 2017, respectively, that are contractually past due 90 days or more.
106
At December 31, 2018 and 2017, the Company had $0.7 million and $0.8 million in residential mortgage loans in
process of foreclosure, respectively.
If the nonaccrual and restructured loans as of December 31, 2018, 2017 and 2016 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 $1,616,000, $1,503,000, and $1,893,000 for
nonaccrual loans and $974,000, $1,182,000, and $1,417,000, for restructured loans would have been recorded for
2018, 2017, and 2016, respectively. Interest income on such loans that was actually collected and included in net
income in 2018, 2017 and 2016 amounted to approximately $765,000, $415,000, and $266,000 for nonaccrual loans
(prior to their being placed on nonaccrual status), and $763,000, $885,000, and $423,000 for restructured loans,
respectively. At December 31, 2018 and 2017, there were no commitments to lend additional funds to debtors
whose loans were nonperforming.
The following is a summary the Company’s nonaccrual loans by major categories.
($ 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,
2018
December 31,
2017
$ 919
2,265
10,115
1,685
7,452
139
$ 22,575
1,001
1,822
12,201
2,524
3,345
75
20,968
107
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2018.
($ 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 costs
Total loans
$ 191
849
14,178
1,048
709
359
990
$ 18,324
5
212
1,369
254
520
220
138
2,718
–
–
–
–
–
–
583
583
919
455,692
456,807
2,265
515,472
518,798
10,115
1,022,261
1,047,923
1,685
7,452
139
–
22,575
355,831
1,768,205
70,422
15,682
4,203,565
358,818
1,776,886
71,140
17,393
4,247,765
1,299
$ 4,249,064
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
108
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2018.
($ 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, 2018
Beginning
balance
Charge-offs
Recoveries
Provisions
Ending balance
$ 3,111
(2,128)
1,195
711
$ 2,889
2,816
(158)
4,097
(4,512)
2,243
6,147
(1,734)
833
(49)
5,197
1,827
(711)
364
185
1,665
6,475
(1,459)
1,503
1,464
7,983
950
(781)
309
474
952
1,972
−
−
(1,862)
110
23,298
(6,971)
8,301
(3,589)
21,039
Ending balances as of December 31, 2018: Allowance for loan losses
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Purchased credit
impaired
$ 2
$ 2,661
$ 226
2,109
4,143
134
955
99
−
48
906
−
−
2,269
1,608
7,070
941
110
18,642
9
7
11
−
−
−
−
−
128
4,247,765
1,299
$ 4,249,064
24,253
4,206,119
17,393
Loans receivable as of December 31, 2018:
Ending balance –
total
Unamortized net
deferred loan
costs
Total loans
$ 457,037
518,976
Ending balances as of December 31, 2018: Loans
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Purchased credit
impaired
$ 230
$ 696
$ 456,111
517,453
1,345
178
1,054,176
359,162
1,787,022
71,392
12,391
296
9,525
−
1,035,532
358,522
1,767,361
71,140
6,253
344
10,136
252
109
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2017.
($ 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
110
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2016.
There were no covered loans at December 31, 2016 and all reserves associated with previously covered loans were
transferred to the non-covered allowance.
($ in thousands)
Real Estate –
Construction,
Land
Development
& Other Land
Loans
Real Estate
–
Residential
(1-4 Family)
First
Mortgages
Real Estate
– Mortgage
– Home
Equity Lines
of Credit
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
1,339
6,365
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
−
111
–
–
−
−
−
−
−
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, 2018.
($ 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
$ 310
485
4,626
22
3,475
−
$ 8,918
$ 386
860
7,765
274
6,050
−
$ 15,335
310
803
4,948
31
4,237
−
10,329
387
864
7,904
275
6,054
−
15,484
−
−
−
−
−
−
−
226
134
955
48
906
−
2,269
957
2,366
4,804
91
3,670
−
11,888
422
385
8,963
184
5,911
2
15,867
Interest income recorded on impaired loans during the year ended December 31, 2018 was insignificant.
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.
112
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 (<$500,000) with a well-defined weakness, such as exceptions of any kind with
no mitigating factors, history of paying outside the terms of the note, insufficient income to
support the current level of debt, etc.
Special Mention:
Classified:
113
The following table presents the Company’s recorded investment in loans by credit quality indicators as of December
31, 2018.
($ 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 costs
Total loans
Pass
Special Mention
Loans
Classified
Accruing Loans
$ 452,373
509,251
1,004,457
348,792
1,750,810
70,357
8,355
$ 4,144,395
3,056
5,668
12,238
1,688
14,484
231
5,214
42,579
459
1,614
21,113
6,653
4,140
413
3,824
38,216
Classified
Nonaccrual
Loans
919
2,265
Total
456,807
518,798
10,115
1,047,923
1,685
358,818
7,452
139
−
22,575
1,776,886
71,140
17,393
4,247,765
1,299
4,249,064
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
Troubled Debt Restructurings
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 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 majority of the Company’s troubled debt restructurings modified during the years ended December 31, 2018 and
2017 related to interest rate reductions combined with restructured amortization schedules. The Company does not
generally grant principal forgiveness.
114
All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for
determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as
either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are
nonaccrual are reported within the nonaccrual loan totals presented previously.
The following table presents information related to loans modified in a troubled debt restructuring during the years
ended December 31, 2018 and 2017.
($ 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
For the year ended
December 31, 2018
For the year ended
December 31, 2017
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
Number of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
Number of
Contracts
−
−
2
−
−
−
−
1
3
−
−
−
6
$ −
$ −
−
254
−
−
−
−
61
340
−
−
−
−
273
−
−
−
−
61
350
−
−
−
−
−
−
−
6
−
1
1
2
−
−
−
$ −
$ −
−
−
−
4,120
−
38
32
262
−
−
−
−
−
−
4,095
−
25
32
262
−
−
−
$ 655
$ 684
10
$ 4,452
$ 4,414
Accruing restructured loans that were modified in the previous 12 months and that defaulted during the years ended
December 31, 2018 and 2017 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)
For the year ended
December 31, 2018
For the year ended
December 31, 2017
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Accruing TDRs that subsequently defaulted
Real estate – mortgage – residential (1-4 family first mortgages)
Real estate – mortgage – commercial and other
Total accruing TDRs that subsequently defaulted
1
3
4
$ 60
1,333
$ 1,393
2
−
2
880
−
$ 880
115
Note 5. Premises and Equipment
Premises and equipment at December 31, 2018 and 2017 consisted of the following:
($ in thousands)
2018
2017
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
$ 38,647
93,794
36,115
2,404
170,960
(51,960)
$ 119,000
38,821
92,337
35,532
2,409
169,099
(52,866)
116,233
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, 2016 through the date of
termination.
($ in thousands)
Balance at January 1, 2016
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
$ 8,439
(2,246)
205
1,554
(2,005)
(236)
(5,711)
$ ―
Note 7. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible
assets as of December 31, 2018 and December 31, 2017 and the carrying amount of unamortizable intangible assets
as of those same dates.
December 31, 2018
December 31, 2017
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
($ in thousands)
Amortizable intangible assets:
Customer lists
Core deposit intangibles
SBA servicing asset
Other
Total
$ 6,013
28,440
5,472
1,303
$ 41,228
1,637
16,469
1,053
957
20,116
Unamortizable intangible assets:
Goodwill
$ 234,368
Activity related to transactions since January 1, 2017 includes the following:
6,013
28,280
2,194
1,303
37,790
233,070
1,090
11,475
207
581
13,353
(1) In connection with the Carolina Bank acquisition on March 3, 2017, the Company recorded a net increase of
$66,540,000 in goodwill and $8,790,000 in a core deposit intangible.
116
(2) 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.
(3) In connection with the Asheville Savings Bank acquisition on October 1, 2017, the Company recorded a net
increase of $88,677,000 in goodwill and $9,880,000 in a core deposit intangible.
In addition to the above acquisition related activity, the Company recorded $3,278,000 and $1,779,000 in servicing
assets associated with the guaranteed portion of SBA loans originated and sold during 2018 and 2017, respectively.
During 2018 and 2017, the Company recorded $846,000 and $207,000, respectively, in related amortization expense.
Servicing assets are recorded for loans, or portions thereof, that the Company has sold but continue to service for a
fee. Servicing assets are recorded at fair value and amortized over the expected lives of the related loans and are
tested for impairment on a quarterly basis.
Amortization expense of all intangible assets totaled $6,763,000, $4,240,000 and $1,211,000 for the years ended
December 31, 2018, 2017 and 2016, respectively.
Goodwill is evaluated for impairment on at least an annual basis – see Note 1(s). For each of the years presented, the
Company’s evaluation indicated that there was no goodwill impairment.
The following table presents the estimated amortization expense related to amortizable intangible assets for each of
the five calendar years ending December 31, 2023 and the estimated amount amortizable thereafter. These
estimates are subject to change in future periods to the extent management determines it is necessary to make
adjustments to the carrying value or estimated useful lives of amortizable intangible assets.
($ in thousands)
Estimated
Amortization Expense
2019
2020
2021
2022
2023
Thereafter
Total
$ 5,649
4,549
3,549
2,459
1,398
3,508
$ 21,112
Note 8. Income Taxes
Total income taxes for the years ended December 31, 2018, 2017, and 2016 were allocated as follows:
($ In thousands)
2018
2017
2016
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
$ 24,189
21,767
14,624
(2,379)
(5)
$ 21,805
321
668
22,756
(685)
(36)
13,903
The components of income tax expense for the years ended December 31, 2018, 2017, and 2016 are as follows:
($ In thousands)
Current - Federal
- State
Deferred - Federal
- State
Total
2018
2017
2016
$ 19,188
3,187
1,658
156
$ 24,189
11,286
1,996
7,742
743
21,767
12,827
1,679
16
102
14,624
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets
(liabilities) at December 31, 2018 and 2017 are presented below:
117
($ In thousands)
2018
2017
Deferred tax assets:
Allowance for loan losses
Excess book over tax pension plan cost
Deferred compensation
Federal & state net operating loss and tax credit 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
$ 4,917
92
367
631
3,036
752
715
1,121
240
208
2,895
310
42
15,326
(36)
15,290
(2,484)
−
(4,278)
(7,921)
(721)
(528)
(122)
−
(16,054)
$ (764)
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)
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 2018 and 2017 deferred tax expense (benefit) of approximately ($2,379,000) and
$321,000 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 2018 and 2017 deferred tax expense
(benefit) of ($5,000) and $668,000 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 liability of approximately $159,000
relating to adjustments made to acquisition transactions that occurred during the prior year. The balance of the 2018
increase in the net deferred tax liability of $1,814,000 is reflected as a deferred income tax expense, and the balance
of the 2017 increase in the net deferred tax liability of $8,485,000 is reflected as a deferred income tax expense in the
consolidated statement of income.
The valuation allowances for 2018 and 2017 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 tax returns are subject to income tax audit by federal and state agencies beginning with
the year 2015. There are no indications of any material adjustments relating to any examination currently being
conducted by any taxing authority.
Retained earnings at December 31, 2018 and 2017 include approximately $6,869,000 representing pre-1988 tax bad
debt reserve base year amounts for which no deferred income tax liability has been provided since these reserves are
118
not expected to reverse or may never reverse. Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the
definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other distributions in
dissolution, liquidation or redemption of the Bank’s stock.
The following is a reconcilement of federal income tax expense at the statutory rate of 21% at December 31, 2018
and 35% at December 31, 2017 and 2016, to the income tax provision reported in the financial statements.
($ In thousands)
2018
2017
2016
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
$ 23,830
(1,117)
(698)
27
2,639
(8)
−
(484)
$ 24,189
23,709
(1,461)
(596)
24
1,780
(1)
(1,269)
(419)
21,767
14,746
(1,202)
(192)
16
1,158
(24)
−
122
14,624
On December 22, 2017, the Tax Cut and Jobs Act was signed into law. Among other things, this 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 were 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. During the fourth quarter of 2017, the Company recorded $1.3 million in tax benefit as
a result of this revaluation.
119
Note 9. Time Deposits and Related Party Deposits
At December 31, 2018, the scheduled maturities of time deposits were as follows:
($ in thousands)
2019
2020
2021
2022
2023
Thereafter
$ 753,537
117,229
48,477
21,726
13,136
817
$ 954,922
Deposits received from executive officers and directors and their associates totaled approximately $1.0 million and
$3.8 million at December 31, 2018 and 2017, 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, 2018 and 2017, the Company held $503.1 million and $405.1 million, respectively, in time
deposits of $250,000 or more (which is the current FDIC insurance limit for insured deposits as of December 31,
2018). Included in these deposits were brokered deposits of $239.9 million and $234.0 million at December 31, 2018
and 2017, respectively.
120
Note 10. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31, 2018 and
2017:
Description – 2018
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
1/10/2019
1/17/2019
1/24/2019
1/31/2019
1/31/2019
4/18/2019
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, 2018
Unamortized discount on acquired borrowings
Total borrowings
2018
Amount
$ 68,000,000
135,000,000
20,000,000
20,000,000
10,000,000
50,000,000
40,000,000
210,000
1,065,000
7,500,000
255,000
61,000
188,000
188,000
379,000
20,620,000
25,774,000
10,310,000
$ 409,550,000
(2,941,000)
$ 406,609,000
Interest Rate
2.47% fixed
2.49% fixed
2.54% fixed
2.53% fixed
2.53% fixed
2.36% 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
0.50% fixed
5.22% at 12/31/2018
adjustable rate
3 month LIBOR + 2.70%
4.18% at 12/31/2018
adjustable rate
3 month LIBOR + 1.39%
4.44% at 12/31/2018
adjustable rate
3 month LIBOR + 2.00%
2.68%
121
Description – 2017
Due date
Call Feature
2017
Amount
Interest Rate
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
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%
$ 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
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 tables, the $10.3 million in borrowings due on January 7, 2035 relate to borrowings structured as trust
preferred capital securities that were issued by Carolina Capital Trust, an unconsolidated subsidiary of the Company.
The Company acquired Carolina Bank Holdings, Inc. and its subsidiary, Carolina Capital Trust, on March 3, 2017.
These unsecured debt securities qualify as capital for regulatory capital adequacy requirements and became callable
by the Company at par on any quarterly interest payment date beginning on January 7, 2010. The interest rate on
these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.00%.
122
At December 31, 2018, the Company had three sources of readily available borrowing capacity – 1) an approximately
$1.04 billion line of credit with the FHLB, of which $353 million was outstanding at December 31, 2018 and $354
million was outstanding at December 31, 2017, 2) a $35 million federal funds line of credit with a correspondent bank,
of which none was outstanding at December 31, 2018 or 2017, and 3) an approximately $127 million line of credit
through the Federal Reserve Bank of Richmond’s (FRB) discount window, of which none was outstanding at December
31, 2018 or 2017.
The Company’s line of credit with the FHLB totaling approximately $1.04 billion 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 $190
million and $198 million at December 31, 2018 and 2017, respectively, 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 $502
million at December 31, 2018 and $384 million at December 31, 2017.
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, 2018 or 2017.
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, 2018, the available line of credit was approximately $127 million. The Company had no
borrowings outstanding under this line of credit at December 31, 2018 or 2017.
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 2018, $2.3 million in 2017, and $1.5 million in 2016.
Future obligations for minimum rentals under noncancelable operating leases at December 31, 2018 are as follows:
($ in thousands)
Year ending December 31:
2019
2020
2021
2022
2023
Thereafter
Total
$ 2,268
1,973
1,344
869
768
4,082
$ 11,304
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. 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 2017 and 2016, 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%. Effective January 1, 2018, the Company’s matching contribution was increased to 100% of the employee’s
salary contribution up to 6%. The Company’s matching contribution expense was $3.6 million, $2.3 million and $1.6
million for the years ended December 31, 2018, 2017, and 2016, respectively. Although discretionary contributions
by the Company are permitted by the plan, the Company did not make any such contributions in 2018, 2017, or 2016.
The Company’s matching and discretionary contributions are made according to the same investment elections each
participant has established for their deferral contributions.
123
Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the “Pension
Plan”) that qualified under Section 401(a) of the Internal Revenue Code. The Pension Plan provided for a monthly
payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual
Compensation (the five highest consecutive calendar years’ earnings out of the last ten years of employment)
multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65% of Final Average Annual
Compensation in excess of the average social security wage base multiplied by years of service not in excess of 35
years. Benefits were fully vested after five years of service. Effective December 31, 2012, the Company froze the
Pension Plan for all participants.
The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants
and are intended to be deductible for income tax purposes. As discussed below, the contributions are invested to
provide for benefits under the Pension Plan. The Company did not make any contributions to the Pension Plan in
2018, 2017, or 2016. The Company does not expect to contribute to the Pension Plan in 2019.
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between the
two amounts representing the funded status of the Pension Plan as of the end of the respective year.
($ 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
2018
2017
2016
$ 38,150
−
1,312
(1,160)
(1,948)
36,354
41,306
(188)
−
(1,948)
39,170
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
Funded status at end of year
$ 2,816
3,156
110
The accumulated benefit obligation related to the Pension Plan was $36,354,000, $38,150,000, and $36,840,000 at
December 31, 2018, 2017, and 2016, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets at
December 31, 2018 and 2017 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands)
Other assets
Other liabilities
2018
2017
$ 2,816
−
$ 2,816
3,156
−
3,156
124
The following table presents information regarding the amounts recognized in accumulated other comprehensive
income (“AOCI”) at December 31, 2018 and 2017, as it relates to the Pension Plan.
($ in thousands)
2018
2017
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
Net amount recognized as increase (decrease) to AOCI
$ (4,034)
−
(4,034)
943
$ (3,091)
(3,925)
−
(3,925)
1,452
(2,473)
The following table reconciles the beginning and ending balances of AOCI at December 31, 2018 and 2017, as it
relates to the Pension Plan:
($ in thousands)
2018
2017
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
$ (2,909)
(143)
34
(73)
(3,091)
−
$ (3,091)
(3,692)
1,686
244
(711)
(2,473)
(436)
(2,909)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension
Plan:
($ in thousands)
2018
2017
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
$ 7,082
(231)
−
$ 6,851
5,965
1,117
̶
7,082
Net pension (income) cost for the Pension Plan included the following components for the years ended December 31,
2018, 2017, and 2016:
($ in thousands)
2018
2017
2016
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
$ −
1,312
(1,115)
34
$ 231
̶
1,449
(2,810)
244
(1,117)
̶
1,502
(2,698)
238
(958)
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.
($ in thousands)
Year ending December 31, 2019
Year ending December 31, 2020
Year ending December 31, 2021
Year ending December 31, 2022
Year ending December 31, 2023
Years ending December 31, 2024-2028
125
Estimated
benefit
payments
$ 1,735
1,792
1,898
1,957
2,000
10,582
The investment objective of the Company’s Pension Plan is to ensure that there are sufficient assets to fund regular
pension benefits payable to employees over the long-term life of the plan. The Plan seeks to allocate plan assets in a
manner that is closely duration-matched with the actuarial projected cash flows of the Plan liabilities, consistent with
prudent standards for preservation of capital, tolerance of investment risk, and maintenance of liquidity. Assets of
the Plan are held by Fidelity Investments (the “Trustee”).
In 2018, the Plan adopted a liability-driven investment (“LDI”) approach to help meet these objectives. The LDI
strategy employs a structured fixed-income portfolio designed to reduce volatility in the Plan’s future funding
requirements and funding status. This is accomplished by using a blend of high quality corporate and government
fixed-income securities, with both intermediate and long-term durations. Generally, the value of these fixed income
securities is inversely correlated to changes in market interest rates, which substantially offsets changes in the value
of the pension benefit obligation caused by changes in the interest rate used to discount plan liabilities.
In the fourth quarter 2017, in anticipation of anticipated changes in investment objectives, the Company liquidated all
investments and shifted the assets into a money market fund.
The fair values of the Company’s pension plan assets at December 31, 2018, by asset category, were as follows:
($ in thousands)
Total Fair Value at
December 31,
2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents
$ 267
Investment funds
Fixed income funds
Total
38,903
$ 39,170
267
−
267
−
38,903
38,903
−
−
−
The fair values of the Company’s pension plan assets at December 31, 2017, by asset category, were 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)
Cash and cash equivalents (money
market fund)
Total
$ 41,306
$ 41,306
−
−
41,306
41,306
−
−
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, 2018 and 2017.
-
-
Cash and cash equivalents (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.
Fixed income funds consist of commingled funds that primarily include investments in U.S. government
securities and corporate bonds. The commingled funds also include an insignificant portion of
investments in other asset-based securities, municipal securities, etc. The commingled funds are valued
at the NAV for the units in the fund. The NAV, as provided by the Trustee, is used as practical expedient
to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund.
Supplemental Executive Retirement Plan. Historically, the Company sponsored a Supplemental Executive Retirement
Plan (the “SERP”) for the benefit of certain senior management executives of the Company. The purpose of the SERP
was to provide additional monthly pension benefits to ensure that each such senior management executive would
receive lifetime monthly pension benefits equal to 3% of his or her final average compensation multiplied by his or
126
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 five highest consecutive calendar years of
earnings during the last ten years of service prior to termination of employment. The SERP is an unfunded plan.
Payments are made from the general assets of the Company. Effective December 31, 2012, the Company froze the
SERP to all participants.
The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed by the
Company’s independent actuarial consultants:
($ in thousands)
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
2018
2017
2016
$ 5,970
124
200
(102)
(398)
5,794
−
$ (5,794)
5,910
118
227
85
(370)
5,970
─
(5,970)
5,778
106
238
145
(357)
5,910
─
(5,910)
The accumulated benefit obligation related to the SERP was $5,794,000, $5,970,000, and $5,910,000 at December 31,
2018, 2017, and 2016, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets at
December 31, 2018 and 2017 as it relates to the SERP, excluding the related deferred tax assets.
($ in thousands)
Other assets – prepaid pension asset (liability)
Other assets (liabilities)
2018
2017
$ (6,608)
814
$ (5,794)
(6,695)
725
(5,970)
The following table presents information regarding the amounts recognized in AOCI at December 31, 2018 and 2017,
as it relates to the SERP:
($ in thousands)
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
Net amount recognized as increase (decrease) to AOCI
2018
2017
$ 814
−
814
(190)
$ 624
725
−
725
(268)
457
127
The following table reconciles the beginning and ending balances of AOCI at December 31, 2018 and 2017, as it
relates to the SERP:
($ in thousands)
2018
2017
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
$ 457
102
−
(13)
−
78
$ 624
533
(85)
−
(34)
−
43
457
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the SERP:
($ in thousands)
2018
2017
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
$ (6,695)
(311)
398
$ (6,608)
(6,754)
(311)
370
(6,695)
Net pension cost for the SERP included the following components for the years ended December 31, 2018, 2017, and
2016:
($ in thousands)
2018
2017
2016
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
$ 124
200
(13)
$ 311
118
227
(34)
311
106
238
(35)
309
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, 2019
Year ending December 31, 2020
Year ending December 31, 2021
Year ending December 31, 2022
Year ending December 31, 2023
Years ending December 31, 2024-2028
Estimated
benefit
payments
$ 411
408
401
391
380
1,970
Assumptions used in both Plans
The following assumptions were used in determining the actuarial information for the Pension Plan and the SERP for
the years ended December 31, 2018, 2017, and 2016:
2018
2017
2016
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
Pension
Plan
3.46%
4.08%
2.75%
n/a
SERP
3.46%
3.92%
n/a
n/a
128
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
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.
For each of the years ended December 31, 2017 and 2016, 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) could be expected to return approximately 7.75% on a long term basis.
As discussed previously, in 2018, the Company changed investment strategies, which resulted in the expected return
on assets being adjusted to 2.75% for the year.
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, 2018.
($ in thousands)
Type of Commitment
Outstanding closed-end loan commitments
Unfunded commitments on revolving lines of credit,
credit cards and home equity loans
Total
Fixed Rate
$ 209,726
149,898
$ 359,624
Variable Rate
460,377
468,793
929,170
Total
670,103
618,691
1,288,794
At December 31, 2018 and 2017, the Company had $15.7 million and $15.2 million, respectively, in standby letters of
credit outstanding. The Company has no carrying amount for these standby letters of credit at either of those dates.
The nature of the standby letters of credit is a stand-alone obligation made on behalf of the Company’s customers to
suppliers of the customers to guarantee payments owed to the supplier by the customer. The standby letters of
credit are generally for terms for one year, at which time they may be renewed for another year if both parties agree.
The 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 minimal amount of standby letters of credit, which have been or are being repaid by the borrower without
any loss to the Company. Management expects any draws under existing commitments to be funded through normal
operations.
The Company is not involved in any legal proceedings which, in management’s opinion, could have a material effect
on the consolidated financial position of the Company.
The Bank grants primarily commercial and installment loans to customers throughout its market area, which consists
of Alamance, Beaufort, Bladen, Brunswick, Buncombe, Cabarrus, Carteret, Chatham, Columbus, Cumberland, Dare,
Davidson, Duplin, Forsyth, Guilford, Harnett, Henderson, 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.
129
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 Bank makes variable rate loans and fixed rate principal-
amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are
underwritten and monitored to manage the associated risks. The Company has determined that there is no
concentration of credit risk associated with its lending policies or practices.
The Company’s investment portfolio consists principally of obligations of government-sponsored enterprises,
mortgage-backed securities guaranteed by government-sponsored enterprises, corporate bonds, 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, 2018 of
securities to any one issuer/guarantor that exceed $5.0 million, with such amounts representing the maximum
amount of credit risk that the Company would incur if the issuer did not repay the obligation.
($ in thousands)
Issuer
Fannie Mae – mortgage-backed securities
Ginnie Mae – mortgage-backed securities
Freddie Mac – mortgage-backed securities
Federal Home Loan Bank System - bonds
Small Business Administration securities
Federal Home Loan Bank of Atlanta - common stock
Federal Reserve Bank - common stock
Bank of America corporate bonds
Citigroup, Inc. corporate bonds
Goldman Sachs Group Inc. corporate bond
JP Morgan Chase corporate bond
Federal Farm Credit Bank – bond
Fannie Mae – bond
Amortized Cost
$ 191,839
127,358
98,608
70,495
26,878
20,036
17,432
7,000
6,028
5,073
5,018
5,000
5,000
Fair Value
186,735
123,593
95,285
70,421
25,977
20,036
17,432
6,879
5,921
4,937
4,904
4,921
4,871
The Company primarily places its deposits and correspondent accounts with the Federal Home Loan Bank of Atlanta,
the FRB, and Pacific Coast Bankers Bank (“PCBB”). At December 31, 2018, the Company had deposits in the Federal
Home Loan Bank of Atlanta totaling $135.4 million, deposits of $246.2 million in the Federal Reserve Bank, and
deposits of $0.2 million in PCBB. None of the deposits held at the Federal Home Loan Bank of Atlanta or the Federal
Reserve Bank are FDIC-insured, however the Federal Reserve Bank is a government entity and therefore risk of loss is
minimal. The deposits held at PCBB are FDIC-insured up to $250,000.
Note 14. Fair Value of Financial Instruments
Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes
three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
130
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring
and nonrecurring basis at December 31, 2018.
($ 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,
2018
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 82,662
385,551
33,138
$ 501,351
$ 13,071
7,440
—
—
—
—
—
—
82,662
385,551
33,138
501,351
—
—
—
—
—
—
13,071
7,440
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 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
131
properly classified in the fair value hierarchy. Further, the Company validates the fair values for a sample of
securities in the portfolio by comparing the fair values provided by the bond accounting provider to prices
from other independent sources for the same or similar securities. The Company analyzes unusual or
significant variances and conducts additional research with the portfolio manager, if necessary, and takes
appropriate action based on its findings.
Impaired loans — Fair values for impaired loans in the above table are measured on a non-recurring basis and
are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the
net present value of the cash flows expected to be received for such loans. Collateral may be in the form of
real estate or business assets including equipment, inventory and accounts receivable. The vast majority of
the collateral is real estate. The value of real estate collateral is determined using an income or market
valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level
3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net
book value on the applicable borrower’s financial statements if not considered significant. Likewise, values
for inventory and accounts receivable collateral are based on borrower financial statement balances or aging
reports on a discounted basis as appropriate (Level 3). Any fair value adjustments are recorded in the period
incurred as provision for loan losses on the Consolidated Statements of Income.
Foreclosed real estate – Foreclosed real estate, consisting of properties obtained through foreclosure or in
satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring
basis and is based upon independent market prices or current appraisals that are generally prepared using an
income or market valuation approach and conducted by an independent, licensed third party appraiser,
adjusted for estimated selling costs (Level 3). At the time of foreclosure, any excess of the loan balance over
the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.
For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over
the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated
Statements of Income.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2018,
the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description
Impaired loans
Fair Value at
December 31,
2018
$ 13,071
Foreclosed real estate
7,440
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%
132
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%
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, 2018 or 2017.
For the year ended December 31, 2018, the decrease in the fair value of securities available for sale was $10,179,000,
and for the year ended December 31, 2017, the increase in the fair value of securities available for sale was $639,000,
which is included in other comprehensive income (net of tax benefit of $2,379,000 and tax expense of $234,000, for
2018 and 2017, respectively). Fair value measurement methods at December 31, 2018 and 2017 are consistent with
those used in prior reporting periods.
As discussed in Note 1(r), the Company is required to disclose estimated fair values for its financial instruments. Fair
value estimates as of December 31, 2018 and 2017 and limitations thereon are set forth below for the Company’s
financial instruments. See Note 1(r) for a discussion of fair value methods and assumptions, as well as fair value
information for off-balance sheet financial instruments.
($ 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
SBA Servicing Asset
Deposits
Borrowings
Accrued interest payable
December 31, 2018
December 31, 2017
Level in
Fair Value
Hierarchy
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Level 1
$ 56,050
56,050
114,301
114,301
Level 1
Level 2
Level 2
Level 1
Level 3
Level 1
Level 1
Level 3
Level 2
Level 2
Level 2
406,848
501,351
101,237
4,279
4,228,025
16,004
101,878
4,419
4,659,339
406,609
1,976
406,848
501,351
99,906
4,279
4,181,139
16,004
101,878
4,617
4,653,522
402,556
1,976
375,189
343,270
118,503
12,459
4,019,071
14,094
99,162
1,987
4,406,955
407,543
1,235
375,189
343,270
118,998
12,459
4,010,551
14,094
99,162
1,987
4,401,757
397,903
1,235
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
133
matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net
premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense accounts,
income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related
to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not
been considered in any of the estimates.
Note 15. Equity-Based Compensation Plans
The Company recorded total stock-based compensation expense of $1,569,000, $1,095,000 and $714,000 for the
years ended December 31, 2018, 2017, and 2016, respectively. Of the $1,569,000 in expense that was recorded in
2018, approximately $352,000 related to the June 1, 2018 director grants discussed below, and is classified as “other
operating expenses” in the Consolidated Statements of Income. The remaining $1,217,000 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 $367,000, $405,000, and $264,000 of income tax benefits related to stock based compensation
expense in the income statement for the years ended December 31, 2018, 2017, and 2016, respectively.
At December 31, 2018, 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 each plan. The First
Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of December 31,
2018, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were
750,707 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 have been restricted stock with service vesting conditions only. Compensation expense for
these grants is recorded over the requisite service periods. No compensation cost is recognized for grants that do not
vest and any previously recognized compensation cost is reversed at forfeiture. The Company issues new shares of
common stock when options are exercised.
Certain of the Company’s equity grants contain terms that provide for a graded vesting schedule whereby portions of
the award vest in increments over the requisite service period. The Company recognizes compensation expense for
awards with graded vesting schedules on a straight-line basis over the requisite service period for each incremental
award. Compensation expense is based on the estimated number of stock 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 with service conditions only will vest.
As it relates to director equity grants, the Company typically grants shares of common stock to each non-employee
director (currently 11 in total) in June of each year. On June 1, 2018, the Company granted 8,393 shares of common
stock to non-employee directors (763 shares per director), at a fair market value of $41.93 per share, which was the
closing price of the Company’s common stock on that date, which resulted in $352,000 in expense. 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.
134
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
of 54,529 shares of restricted stock have been granted related to performance in the preceding fiscal years (net of an
immaterial amount of forfeitures). Total compensation expense associated with those grants was $1,410,000 and is
being recognized over the respective vesting periods. The Company recorded $293,000, $282,000 and $220,000, for
the years ended December 31, 2018, 2017, and 2016, respectively.
In the last three years, the Compensation Committee of the Company’s Board of Directors also granted 117,704
shares of stock to various employees of the Company to promote retention. The total value associated with these
grants amounted to $3,621,000, and is being recorded as expense over their three year vesting periods. For 2018,
2017, and 2016, total compensation expense related to these grants was $924,000, $491,000, and $366,000,
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
$1,218,000 in stock-based compensation expense in 2019.
The following table presents information regarding the activity during 2016, 2017, and 2018 related to the Company’s
outstanding restricted stock:
Long-Term Restricted Stock
Nonvested at January 1, 2016
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
(28,514)
(8,535)
31.05
20.05
18.34
Nonvested at December 31, 2017
103,063
$ 24.08
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2018
66,060
(35,703)
(4,169)
40.04
22.82
29.99
129,251
$ 32.39
In years prior to 2010, 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, 2018, there were 9,000 stock options outstanding related to the Company’s two equity-based plans,
all with an exercise price of $14.35 and an exercise date of June 1, 2019.
135
The following table presents information regarding the activity since January 1, 2016 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, 2016
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
−
−
Balance at December 31, 2017
38,689
$ 16.09
Granted
Exercised
Forfeited
Expired
−
(29,689)
−
−
−
16.61
−
−
$ 81,894
$ 236,584
$ 659,743
Outstanding at December 31, 2018
9,000
$ 14.35
0.42
$ 163,038
Exercisable at December 31, 2018
9,000
$ 14.35
0.42
$ 163,038
In 2018, 2017, and 2016, the Company received $324,000, $287,000 and $375,000, respectively, as a result of stock
option exercises.
Note 16. Regulatory Restrictions
The Company is regulated by the Board of Governors of the 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
“adequately capitalized.”) As of December 31, 2018, approximately $582,000,000 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
$3,553,000 for the year ended December 31, 2018.
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
136
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,
2018 was 1.875%.
As of December 31, 2018, 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, 2018 and 2017 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.
137
($ in thousands)
As of December 31, 2018
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, 2017
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)
$ 535,566
586,053
12.28%
13.44%
$ 305,287
305,163
7.00%
7.00%
$ N/A
283,366
609,428
607,717
587,764
586,053
587,764
586,053
13.97%
13.94%
13.48%
13.44%
10.47%
10.45%
457,930
457,745
370,705
370,555
224,014
224,406
10.50%
10.50%
N/A
435,948
8.50%
8.50%
4.00%
4.00%
N/A
348,758
N/A
280,508
$ 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
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, 2018, 2017, and 2016 are as follows:
($ in thousands)
2018
2017
2016
Other service charges, commissions, and fees – debit card interchange income
Other service charges, commissions, and fees – other interchange income
$ 10,466
4,140
7,732
3,722
6,564
3,018
Other operating expenses – dues and subscriptions (includes software subscriptions)
Other operating expenses – credit/debit card processing expense
Other operating expenses – data processing expense
Other operating expenses – marketing
Other operating expenses – telephone and data line expense
Other operating expenses – stationery and supplies
Other operating expenses – FDIC insurance expense
Other operating expenses – outside consultants
Other operating expenses – repossession and collection
3,431
3,411
3,234
3,065
3,024
2,582
2,333
1,820
1,366
1,889
2,797
2,910
2,549
2,470
2,399
2,350
2,511
1,736
1,604
2,296
2,010
1,999
2,311
2,066
2,009
1,700
1,842
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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,
2018
2017
$ 5,544
816,648
7
−
822,199
53,902
4,067
57,969
764,230
$ 822,199
4,535
745,669
7
−
750,211
53,758
3,474
57,232
692,979
750,211
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31,
2018
2017
2016
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
$ 15,525
77,050
(2,498)
(788)
89,289
−
Net income available to common shareholders
$ 89,289
52,732
(4,793)
(1,867)
(100)
45,972
−
45,972
9,000
20,517
(1,216)
(792)
27,509
(175)
27,334
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
2018
Year Ended December 31,
2017
2016
Operating Activities:
Net income
Excess of dividends over earnings of subsidiaries (Equity in
$ 89,289
undistributed earnings of subsidiaries)
Decrease (increase) 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
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
(77,050)
(13)
146
12,372
−
−
−
−
−
(11,281)
324
(406)
(11,363)
1,009
4,535
$ 5,544
139
45,972
4,793
283
(67)
50,981
(9,000)
3,054
174
(37,664)
(43,436)
(7,596)
287
(231)
(7,540)
5
4,530
4,535
27,509
(20,517)
15
130
7,137
−
−
−
−
−
(6,632)
375
(166)
(6,423)
714
3,816
4,530
Note 19. Shareholders’ Equity
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 in preferred dividend payments for the Series C Preferred Stock during 2016.
Rabbi Trust Obligation
With the acquisition of Carolina Bank in March 2017, the Company assumed a deferred compensation plan for certain
members of Carolina Bank’s board of directors that is fully funded by Company stock, which was valued at $7.7
million on the date of acquisition. Subsequent to the acquisition in 2017, approximately $4.5 million of the deferred
compensation has been paid to the plan participant. The balances of the related asset and liability were each $3.2
million at December 31, 2018, both of which are presented as components of shareholders’ equity.
140
Note 20. Revenue from Contracts with Customers
All of the Company’s revenues that are in the scope of the “Revenue from Contracts with Customers” accounting
standard (“ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources
of noninterest income for years ended December 31, 2018, 2017, and 2016. Items outside the scope of ASC 606 are
noted as such.
($ in thousands)
Service charges on deposit accounts
Other service charges, commissions, and fees:
Interchange income
Other fees
Fees from presold mortgage loans (1)
Commissions from sales of insurance and financial products:
Insurance income
Wealth management income
SBA consulting fees
SBA loan sale gains (1)
Bank-owned life insurance income (1)
Foreclosed property gains (losses), net
FDIC indemnification asset income (expense), net (1)
Securities gains (losses), net (1)
Gain on branch sale (1)
Other gains (losses), net (1)
Total noninterest income
(1) Not within the scope of ASC 606.
For the Years Ended December 31,
2018
2017
2016
$ 12,690
11,862
10,571
14,606
5,339
2,735
6,038
2,693
4,675
10,366
2,534
(565)
−
−
−
723
$ 61,834
11,454
3,156
5,695
3,148
2,152
4,024
5,479
2,321
(531)
−
(235)
−
383
48,908
9,582
2,331
2,033
1,763
2,027
3,199
1,433
2,052
(625)
(10,255)
3
1,466
(29)
25,551
A description of the Company’s revenue streams accounted for under ASC 606 is detailed below.
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based,
account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft
occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account
maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month,
representing the period over which the Company satisfies the performance obligation. Transaction-based fees, which
include services such as ATM use fees, stop payment charges, statement rendering, are recognized at the time the
transaction is executed as that is the point in time the Company fulfills the customer’s request. Service charges on
deposits are withdrawn from the customer’s account balance.
Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and
credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily
comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card
payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the
underlying transaction value and are recognized daily, concurrently with the transaction processing services provided
to the cardholder. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s
checks, ATM surcharge fees, and other services. The Company’s performance obligation for fees, exchange, and
other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon
completion. Payment is typically received immediately or in the following month.
Commissions from the sale of insurance and financial products: The Company earns commissions from the sale of
insurance policies and wealth management products.
Insurance income generally consists of commissions from the sale of insurance policies and performance-based
commissions from insurance companies. The Company recognizes commission income from the sale of insurance
policies when it acts as an agent between the insurance company and the policyholder. The Company’s performance
obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the policy is issued, the carrier
141
remits the commission payment to the Company, and the Company recognizes the revenue. Performance-based
commissions from insurance companies are recognized at a point in time as policies are sold.
Wealth Management Income primarily consists of commissions received on financial product sales, such as annuities.
The Company’s performance obligation is generally satisfied upon the issuance of the financial product. Shortly after
the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the
revenue. The Company also earns some fees from asset management, which is billed quarterly for services rendered
in the most recent period, for which the performance obligation has been satisfied.
SBA Consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees
are based on a percentage of the dollar amount of the originated loans and are recorded when the performance
obligation has been satisfied.
Foreclosed property gains (losses), net: The Company records a gain or loss from the sale of foreclosed property
when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When
the Company finances the sale of foreclosed property to the buyer, the Company assesses whether the buyer is
committed to perform their obligations under the contract and whether collectability of the transaction price is
probable. Once these criteria are met, the foreclosed property asset is derecognized and the gain or loss on sale is
recorded upon the transfer of control of the property to the buyer.
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect
the determination of the amount and timing of revenue from the above-described contracts with customers.
142
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, 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, 2018, 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, 2019 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, 2019
143
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, 2018 based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
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, 2018 and 2017 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, 2018, and the related notes to the consolidated financial
statements, and our report dated March 1, 2019 expressed an unqualified opinion.
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
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
144
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, 2019
145
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure
that information required to be disclosed in our periodic reports with the SEC is recorded, processed, summarized
and reported within the required time periods. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed is communicated to our
management to allow timely decisions regarding required disclosure. Based on the evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and procedures are effective in allowing
timely decisions regarding disclosure to be made about material information required to be included in our periodic
reports with the SEC.
Management’s Report On Internal Control Over Financial Reporting
Management of First Bancorp and its subsidiaries (the “Company”) is responsible for establishing and maintaining
effective internal control over financial reporting. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
Under the supervision and with the participation of management, including the principal executive officer and
principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013). Based on 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, 2018.
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, 2018, and audited the Company’s effectiveness of
internal control over financial reporting as of December 31, 2018, as stated in their report, which is included in Item 8
hereof.
146
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 2018 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.
Additional Information Regarding the Registrant’s Equity Compensation Plans
At December 31, 2018, 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, 2018 regarding shares of the Company’s stock that may
be issued pursuant to the Company’s equity-based compensation plans. At December 31, 2018, the Company had no
warrants or stock appreciation rights outstanding under any compensation plans.
(a)
(b)
(c)
As of December 31, 2018
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))
Plan category
9,000
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.
─
750,707
─
9,000
$ 14.35
$ 14.35
750,707
─
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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
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.
148
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. (*)
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. (*)
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
10.l
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 31, 2016, as 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. (*)
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. (*)
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.m
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. (*)
149
10.n
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. (*)
10.o
10.p
10.q
The Executive Nonqualified Excess Plan Document was filed as Exhibit 10.q to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2017, and is incorporated herein by reference. (*)
The Executive Nonqualified Excess Plan Adoption Agreement dated January 30, 2017 was filed as Exhibit 10.r
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and is incorporated
herein by reference. (*)
The Executive Nonqualified Excess Plan Adoption Agreement dated February 26, 2018 was filed as Exhibit
10.s to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and is
incorporated herein by reference. (*)
21 List of Subsidiaries of Registrant was filed as Exhibit 21 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2017 and is incorporated herein by reference.
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, 2018, 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.
150
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 2019.
SIGNATURES
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, 2019
Board of Directors
/s/ James C. Crawford, III
James C. Crawford, III
Chairman of the Board
Director
March 1, 2019
/s/ Donald H. Allred
Donald H. Allred
Director
March 1, 2019
/s/ Daniel T. Blue, Jr.
Daniel T. Blue, Jr.
Director
March 1, 2019
/s/ Mary Clara Capel
Mary Clara Capel
Director
March 1, 2019
/s/ Suzanne DeFerie
Suzanne DeFerie
Director
March 1, 2019
151
/s/ Eric P. Credle
Eric P. Credle
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
March 1, 2019
/s/ Michael G. Mayer
Michael G. Mayer
Director
March 1, 2019
/s/ Richard H. Moore
Richard H. Moore
Director
March 1, 2019
/s/ Thomas F. Phillips
Thomas F. Phillips
Director
March 1, 2019
/s/ O. Temple Sloan, III
O. Temple Sloan, III
Director
March 1, 2019
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
March 1, 2019
/s/ Abby J. Donnelly
Abby J. Donnelly
Director
March 1, 2019
/s/ John B. Gould
John B. Gould
Director
March 1, 2019
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
March 1, 2019
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
March 1, 2019
152