2021
Year IN Review
Richard H. Moore
Chief Executive Officer
Dear Shareholders,
Customers, and Friends,
As we faced another year of uncertainty
in 2021 with the ongoing pandemic,
our First Bank team focused on what
we know how to do best – to be
the best community bank in every
community we serve and through
every delivery channel we offer.
In March 2021, we announced our
corporate social responsibility
program, the Power of Good.
Through this initiative, we performed
good deeds for unsuspecting
strangers and combined forces with
our charitable giving by donating
collectively to a different nonprofit
each quarter, including a $10,000
match for all employee donations.
Later that month, we opened our
newest and largest branch in Wake
County, a state-of-the art building
which will also serve as First Bank’s
Triangle headquarters. This facility
signifies our commitment to the area
and to serving our Wake County
customers with our trademark
dedication to service and flexibility, all
while offering a large suite of business
banking solutions and loan options.
On June 1, 2021, we announced
the signing of a definitive merger
agreement to acquire Select Bancorp,
Inc. and its subsidiary, Select Bank &
Trust Company, a community bank we
have respected for years that operated
in many of the markets we know
well. We were thrilled to make this
announcement due to Select Bank’s
similar history of service and strong
community banking relationships.
Also in June 2021, we were recognized
by Forbes as a Best-In-State Bank
in North Carolina for the third year
in a row and the only bank in North
continued...
2021 Highlights
$10,000 match for all
employee donations through
Power Of Good program
Opening of First Bank’s
Triangle headquarters
in Raleigh, NC
#1 Best-In-State Bank
in North Carolina
Mastercard “Doing Well
By Doing Good Award”
August 2021
2021 Year In Review
Carolina to receive the award. This
ranking was based on customer
satisfaction surveys in the areas of trust,
terms and conditions, branch services,
digital services, and financial advice.
We were once again highlighted for
the role we serve in our communities
when Mastercard announced in
August 2021 that we had received the
“Doing Well By Doing Good Award” in
recognition of the Bank’s “unique and
meaningful approach in leveraging its
assets and strategies to positively serve
and impact the community in 2020.”
In October 2021, we announced
changes in the management team of
the Bank just in time for the closing
On June 1, 2021, we
announced the signing of a
definitive merger agreement
to acquire Select Bancorp, Inc.
and its subsidiary, Select Bank
& Trust Company, a community
bank we have respected for
years that operated in many
of the markets we know well.
These changes underscored
our commitment to
implement our strategy of
thoughtful and disciplined
growth as we look into
the future with our new Select
Bank & Trust colleagues.
of our acquisition of Select Bancorp,
Our balance sheet grew in 2021 both
Inc. and its subsidiary, Select Bank
organically and through the acquisition
& Trust Company. Adam Currie
of Select Bank & Trust, with total
We engaged with our communities
on multiple other fronts in 2021
by increasing our Community
Development Lending to over $500
million; promoting and addressing
quality, affordable housing; providing
stepped into a new role as Chief
assets increasing 44.2% to $10.5 billion.
financial wellness education resources;
Banking Officer; Elizabeth Bostian
This increase included loan growth of
and striving to build an inclusive,
was named Chief Financial Officer
$382.8 million, or 8.6%, and deposit
following the retirement of Eric Credle;
growth of $1.3 billion, or 21.5%,
diverse, and equitable organization that
represents the communities we serve.
and Blaise Buczkowski became the
excluding loans and deposits acquired
Chief Administrative and Accounting
from Select Bank & Trust and runoff
In January 2022, we continued to build
Officer. Furthermore, we aligned our
of Paycheck Protection Program loans
on our Power of Good campaign with
business into three organizational
that were forgiven in 2021. From an
the announcement of Project Launch and
lines: Commercial Banking, led by
earnings perspective, our earnings per
our commitment to donate $500,000 in
Brad Mickle, Community Banking, led
share amounted to $3.19 per share in
support of local education initiatives.
by Rob Patterson, and Retail Banking,
2021, an increase of 13.5% from 2020.
led by Bill Bunn. These changes
We remain grateful to you – our
underscored our commitment to
For shareholders, we recently announced
shareholders, customers, and friends –
implement our strategy of thoughtful
the authority to repurchase up to $40
for allowing us the opportunity to help
and disciplined growth as we look into
million of our stock throughout the course
you realize your dreams and serve your
the future with our new Select Bank &
of 2022 and an increase in our quarterly
communities in 2021. Here’s to another
Trust colleagues.
dividend payout to $0.22 per share.
year of partnership with you in 2022!
We are continuing to build on our
Power of Good campaign in 2022 with
the announcement of Project Launch and
our commitment to donate $500,000 in
support of local education initiatives.
Sincerely,
Richard H. Moore
Chief Executive Officer
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, 2021
Commission File Number 0-15572
FIRST BANCORP
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
North Carolina
56-1421916
300 SW Broad St., Southern Pines,
North Carolina
(Address of Principal Executive Offices)
28387
(Zip Code)
(Registrant's telephone number, including area code)
(910) 246-2500
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, No Par Value
FBNC
The Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
of 1933. ☒ Yes ☐ 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 ☒ 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. ☒ 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). ☒ Yes ☐ No
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.
☒ 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 has filed a report on and attestation to its management's assessment
of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act
(15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ 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, 2021 as reported by The NASDAQ Global Select Market, was
approximately $1,139,076,000.
The number of shares of the registrant’s Common Stock outstanding on March 1, 2022 was 35,649,671.
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
CROSS REFERENCE INDEX
FORM 10-K
Glossary of Terms and Acronyms
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of
Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8
Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 2021
Consolidated Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2021
Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period
ended December 31, 2021
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2021
Notes to the Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
(BDO USA, LLP; Raleigh, NC; PCAOB ID# 243)
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
SIGNATURES
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Page
4
5
18
27
27
27
27
28
30
30
61
62
63
64
65
66
67
123
127
127
128
128
128
128
129
129
130
132
133
*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s
definitive Proxy Statement for the 2022 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 30, 2022.
3
MD&A and Financial Statement References
In this report: "2021 MD&A" and "2021 MD&A (Item 7)" generally refer to Management’s Discussion and Analysis of
Financial Condition and Results of Operations (inclusive of Glossary of Terms and Acronyms below), appearing in
Item 7 within Part II of this report; and, "2021 Financial Statements" and "2021 Financial Statements (Item 8)"
generally refer to our Consolidated Balance Sheets, our Consolidated Statements of Income, our Consolidated
Statements of Comprehensive Income, our Consolidated Statements of Changes in Equity, our Consolidated
Statements of Cash Flows, and the Notes to the Consolidated Financial Statements, all appearing in Item 8 within
Part II of this report.
Glossary of Terms and Acronyms
The following terms and acronyms may be used throughout this Report, with the exception of Item 8.
ACL
AFS
ALCO
AML
Annual Report
or Report
Allowance for credit losses
Available for sale
Asset/Liability Management Committee
The Anti-Money Laundering Act of 2020
Annual Report on Form 10-K
FPSB Accounting Standards Codification
FPSB ASC Topic 326, Financial Instruments –
Credit Losses
ASB Bancorp, Inc. and its subsidiary Asheville
Savings Bank SSB
FFCS
FHLB
FHLMC
FINCEN
First Bank
Insurance
FNMA
GAAP
GNMA
Federal Farm Credit System
Federal Home Loan Bank
Federal Home Loan Mortgage Corporation
Financial Crimes Enforcement Network
First Bank Insurance Services, Inc.
Federal National Mortgage Association
Accounting principles generally accepted in the
United States of America
Government National Mortgage Association
Automated teller machine
GSE
U.S. government-sponsored enterprise
First Bank
Third Installment of the Basel Committee and
Banking System Accords
HTM
Incurred Loss
Held to maturity
Incurred loss impairment framework for loan loss
pursuant to ASC 310-30
ASC
ASC 326
Asheville
Savings
ATM
Bank
Basel III
BHC Act
Board
BOLI
BSA
Bank Holding Company Act of 1956, as amended
Board of Directors of First Bancorp
Bank owned life insurance
Bank Secrecy Act
LIBOR
Magnolia
Financial
MD&A
NASDAQ
CARES Act
Carolina Bank Carolina Bank Holdings, Inc. and it subsidiary
Coronavirus Aid, Relief, and Economic Safety Act
NIM
Non-PCD
Carolina Bank
Current expected credit loss model
CECL
Chief Executive Officer
CEO
Common equity tier 1
CET1
CFPB
Consumer Financial Protection Bureau
Commissioner North Carolina Commissioner of Banks
NPA
NSF
OCC
OFAC
Patriot Act
Company
CRA
DIF
Dodd Frank
Act
EPS
Exchange Act
First Bancorp and its consolidated subsidiaries
Community Reinvestment Act of 1977
Deposit Insurance Fund of the FDIC
Dodd-Frank Wall Street Reform and Consumer
Protection Act
Earnings per share
Securities Exchange Act of 1934, as amended
FASB
FDIC
Federal
Financial Accounting Standards Board
Federal Deposit Insurance Corporation
Board of Governors of the Federal Reserve
London Interbank Offered Rate
Magnolia Financial, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
National Association of Securities Dealers
Automated Quotations Stock Market’s Global
System
Net interest margin
Non-purchased Credit Deteriorated Financial
Asset
Nonperforming asset
Non-sufficient funds
Office of the Comptroller of the Currency
U.S. Department of the Treasury’s Office of
Uniting and Strengthening American by Providing
Appropriate Tools Required to Intercept and
Obstruct Terrorism
Purchased credit deteriorated loans
Paycheck Protection Program
United States Small Business Administration
PCD
PPP
SBA
SBA Complete SBA Complete, Inc.
SEC
Select
Securities and Exchange Commission
Select Bancorp, Inc. and its subsidiary Select
Bank & Trust Company
Tangible common equity
Troubled debt restructuring
TCE
TDR
U.S. Treasury United States Department of Treasury
We/us/our
First Bancorp and its consolidated subsidiaries
4
FORWARD-LOOKING STATEMENTS
This Annual 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 and, further,
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,” "anticipate," "intend,“ "estimate,” “plan,” “project,” or other
qualifications concerning our opinions or judgments 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 our actual
results, see the “Risk Factors” section in Item 1A of this Report.
PART I
Item 1. Business
General Description
The Company is the fourth largest bank holding company headquartered in North Carolina. At December 31, 2021,
the Company had total consolidated assets of $10.5 billion, total loans of $6.1 billion, total deposits of $9.1 billion,
and shareholders’ equity of $1.2 billion. Our principal activity is the ownership and operation of 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 for the purpose of acquiring 100% of the
outstanding common stock of the Bank through a stock-for-stock exchange.
The Bank began banking operations in 1935 as the Bank of Montgomery, named for the county in which it operated.
In 1985, its name was changed to First Bank. In September 2013, the Company and the Bank moved their main
offices approximately 45 miles from Troy, North Carolina to Southern Pines, North Carolina, in Moore County. As of
December 31, 2021, we conducted business from 121 branches, with 114 branch offices located across North
Carolina and seven branches in South Carolina, primarily in the Pee Dee area.
As of year end, the Bank had three wholly-owned subsidiaries, SBA Complete, Magnolia Financial, and First Troy
SPE, LLC. SBA Complete specializes in providing consulting services for financial institutions across the country
related to SBA loan origination and servicing. Magnolia Financial is a business financing company that offers
accounts receivable financing and factoring, inventory financing, and purchase order financing throughout the
southeastern United States. First Troy SPE, LLC, which was organized in December 2009, is a holding entity for
certain foreclosed properties. During 2021, the Bank sold substantially all of the assets of a fourth subsidiary, First
Bank Insurance, an insurance agency.
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 shall mean collectively the Company and its consolidated subsidiaries.
General Business
We engage in a full range of banking 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 and individual
retirement accounts. 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. Through Magnolia Financial we provide accounts receivable financing and factoring,
inventory financing, and purchase order financing. We also offer credit cards, debit cards, letters of credit, safe
deposit box rentals, and electronic funds transfer services, including wire transfers. In addition, to enhance the
convenience of our customers, we provide internet banking, mobile banking, cash management, and bank-by-
phone capabilities, and a fleet of ATMs across our branch network. A mobile check deposit feature is offered to our
5
mobile banking customers that allows them to securely deposit checks via their smartphone. For our business
customers, we offer remote deposit capture, which empowers them to electronically transmit checks received from
their customers into their bank accounts without having to visit a branch. The Bank is a member of the Certificate of
Deposit Account Registry Service (“CDARS”), which gives our customers the ability to obtain FDIC insurance on
deposits of up to $50 million, while continuing to work directly with their local First Bank deposit team.
Because the majority of our customers are individuals and small- to medium-sized businesses, we do 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 “Competition.”
We also offer various ancillary services as part of our commitment to customer service. Through a contractual
relationship, we offer the placement of property and casualty insurance. We also provide 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 the Bank's investments division, FB
Wealth Management Services.
The Bank offers SBA loans to small business owners throughout the nation, which is supported by its 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 the parent of 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 Item 7 under the
section entitled “Borrowings.”
Competition
Historically, our branches and facilities have primarily been located in small- to medium-sized communities with
economies based primarily on a variety of industries, including services and manufacturing. Additionally, a number
of the communities we serve are “bedroom” communities of large North Carolina cities including Charlotte, Raleigh
(Triangle region), and Greensboro/Winston-Salem (Triad region), and many of our branches are located in medium-
sized cities such as Albemarle, Asheboro, Asheville, Fayetteville, Greenville, Jacksonville, High Point, Southern
Pines, Sanford, and Wilmington.
In recent years, we have implemented a strategy of expansion into larger, higher growth 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.
We subsequently opened three new branches in cities just outside of Raleigh. We opened our first loan production
office in Greensboro in 2016, and we now have 10 branches in the Triad region. Our expansion into higher growth
markets was significantly enhanced by several strategic transactions that occurred in 2016, 2017, and 2021. See
the discussion below entitled “Mergers and Acquisitions.”
We have three markets that hold significant shares of our deposit base. Moore County, the headquarters of the
Company, has total deposits comprising approximately 9.6% of our deposit base. Buncombe County, the former
headquarters of one of our 2017 acquisitions (Asheville Savings), holds 8.6% of our total deposit base, while
Guilford County, the former headquarters of another 2017 acquisition (Carolina Bank), holds 7.0% of our deposit
base. Accordingly, material changes in competition, the economy, or the population of these markets could
materially impact the Company. No other market areas comprises more than 5% 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, especially in the current low interest rate environment, the
competition for high-quality loans remains intense. Accordingly, loan rates in our markets continue to be under
competitive pressure. 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.
6
We compete not only against banking organizations, but also against a wide range of financial service providers,
including savings institutions, credit unions, mortgage loan originators, 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. Increasingly, we compete with other companies based on financial technology
capabilities. Competition among providers of financial products and services continues to increase as technology
advances have lowered the barriers to entry for financial technology companies, with customers having the
opportunity to select from a growing variety of traditional and nontraditional alternatives, including crowdfunding,
digital wallets, and money transfer services. The ability of non-banking financial institutions to provide services
previously limited to commercial banks has intensified competition. Because non-bank financial institutions are not
subject to the same regulatory restrictions as banks and bank holding companies, they often can operate with
greater flexibility and lower cost structures.
We believe we have certain advantages over our competition in the areas we serve. Compared to the smaller
financial institutions we compete against, our size enables us to absorb more easily the higher costs associated with
being in the financial services industry, particularly regulatory costs and technology costs. We also are able to
originate significantly larger loans than many of our smaller competitors. In our competition with larger banks, we
attempt to maintain a community banking culture – 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.
Mergers and Acquisitions
We pursue an acquisition strategy 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.
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, and we have purchased a
number of bank branches from other banks (both in existing market areas and in contiguous/nearly contiguous
markets). Also, as discussed below, we acquired companies that specialize in SBA loans and business financing,
which brought new products and services to the Company.
In May 2016, we completed the acquisition of SBA Complete, a consultant to 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 Report.
In connection with our acquisition of SBA Complete, we leveraged its capabilities by launching our own SBA
Lending Division. Through a network of specialized 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 Report.
In July 2016, we exchanged our seven Virginia branches with approximately $151 million in loans and $134 million
in deposits for six North Carolina branches of a Virginia bank with approximately $152 million in loans and $111
million in deposits. Four of the six branches we acquired 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 our Triad region expansion initiative, while the Mooresville and Huntersville branches increased our
Charlotte market expansion.
7
We acquired Bankingport, Inc., an insurance agency based in Sanford, North Carolina, in 2016 and Bear Insurance
Services, Inc., an insurance agency based in Albemarle, North Carolina, in 2017 to create a platform for providing
insurance services throughout our branch network. After successfully integrating and operating these acquired
companies within our subsidiary, First Bank Insurance, we sold substantially all of the assets of this subsidiary
effective June 30, 2021 to a Virginia-based insurance services provider for cash and an equity interest in the
Virginia acquirer, and entered into an agreement with it to provide insurance services through our branches.
In March 2017, we acquired Carolina Bank, a community bank headquartered in Greensboro with $682 million in
assets and eight branches located in Greensboro, Winston-Salem, Burlington, and Asheboro. This acquisition
significantly accelerated our expansion initiative in the Greensboro/Winston-Salem market.
In October 2017, we acquired Asheville Savings which 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.
On September 1, 2020, we completed the acquisition of Magnolia Financial, a business financing company
headquartered in Spartanburg, South Carolina, that makes loans throughout the southeastern United States.
Magnolia Financial held $14.6 million in loans at the date of acquisition. Although not material to our Company’s
consolidated operations, the acquisition provided us with the opportunity to enhance our product offerings, such as
accounts receivable financing and factoring, inventory financing, and purchase order financing.
In October 2021, we acquired Select, a community bank headquartered in Dunn, North Carolina with $1.8 billion in
assets, $1.3 billion in loans, and $1.6 billion in deposits. Select operated from 22 branches located throughout
North Carolina, in the Upstate of South Carolina and in Virginia Beach, Virginia. We have closed or will close and
consolidate 12 of Select's branches during 2022.
There are many factors that we consider when evaluating how much to offer for potential acquisition candidates.
The more significant factors we analyze are 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.
Human Capital Resources
Our employees are key to our success. We are committed to attracting, retaining, and promoting top quality talent
regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion, and physical ability.
We strive to identify and select the best candidates for all open positions based on the qualifying factors for each
job. We are dedicated to providing a workplace for our employees that is inclusive, supportive, and free of any form
of discrimination or harassment; rewarding and recognizing our team members based on their individual results and
performance; and recognizing and respecting all of the characteristics and differences that make each of our
employees unique. In 2020, we formed a Diversity Council, which is chaired by our CEO and meets regularly. The
Diversity Council is focused on recommending actions for improvement and identifying barriers that impede
progress related to the following areas:
•
•
•
Creating a work environment that demonstrates all views are respected and provides equal access to
opportunities for growth and advancement;
Ensuring all open positions have a diverse pool of candidates, and our job requirements align with our
principles and the markets we serve; and
Creating internal organizational learning opportunities in which associates may voluntarily participate to
deepen and develop personal understanding of diversity, equity, and inclusion.
In October 2020, we encouraged our employees to participate in "Global Diversity Awareness Month." Team activity
guides promoting diversity and learning about other cultures were distributed to promote this initiative.
8
Maintaining and further enhancing our corporate culture is an important element of our Board’s oversight of risk
because our people are critical to the implementation of our corporate strategy. Our Board sets the “tone at the
top” and holds senior management accountable for embodying, maintaining, and communicating our culture to
employees. Our culture is guided by a philosophy we call Our Promise to Service Excellence. The principles of
Our Promise to Service Excellence are: Safety and Soundness, Knowledge and Accuracy, Courteous Service, and
Convenience and Ease.
We have developed specialized training that all new associates receive, and we hold regular team meetings and
training that promote our Service Excellence principles. By emphasizing a consistent set of principles for all
associates, we believe that our associates' work experience is more satisfying, and they are better able to serve
their customers consistently and at a high level.
We also seek to design careers with our Company that are fulfilling, with competitive compensation and benefits
alongside a positive work-life balance. We dedicate resources to fostering professional and personal growth with
continuing education, on-the-job training, and development programs.
We have worked closely with our employees during the COVID-19 pandemic to ensure their safety and their ability
to take care of their families. we established health safety protocols, facilitated remote work arrangements, and
considered ways to provide for family needs, such as child care, all without any employee layoffs or furloughs.
As of December 31, 2021, we had 1,179 full-time and 55 part-time employees. We are not a party to any collective
bargaining agreements, and we consider our employee relations to be good.
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 our Division Banking Executives
have authority to approve secured loans up to $1,000,000. Loans up to $10,000,000 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 $25,000,000, while the President and the Chief Credit Officer have
joint authority to approve loans up to $75,000,000. The Bank’s Board maintains loan authority in excess of the
Bank’s in-house limit, currently $75,000,000, and generally approves loans through its Executive Loan Committee.
Our legal lending limit to any one borrower is approximately $153.7 million. All lending authorities are based on the
borrower’s total credit exposure, which is an aggregate of the Bank’s lending relationship with the borrower 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 regularly 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 Bank’s Board 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. The Loan Review Department also
provides training assistance to the Bank’s Training and Credit Administration departments.
9
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 review 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 Board
and are considered by management in setting Bank policy, and in evaluating the adequacy of our allowance for
credit losses. For additional information, see “Allowance for Credit 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 GSEs, mortgage-backed securities, collateralized mortgage obligations, commercial
mortgage-backed securities, state and municipal obligations, public housing authority bonds, and, to a limited
extent, corporate bonds. We also also invest up to $60 million in time deposits with other financial institutions. Time
deposit purchases from any one financial institution exceeding FDIC insurance coverage limits are evaluated as a
corporate bond and are subject to the same due diligence requirements as corporate bonds (described below).
In making investment decisions, we do not solely rely on credit ratings to determine the credit-worthiness of an
issuer of securities, but we use credit ratings in conjunction with other information when performing due diligence
prior to the purchase of a security. Securities that are not rated investment grade will not be purchased. Securities
rated below Moody’s BAA or Standard and Poor’s BBB generally will not be purchased. Securities rated below A are
periodically reviewed for credit-worthiness. We may purchase non-rated municipal bonds only if such bonds are in
our general market area and we determine these bonds have a credit risk no greater than the minimum ratings
referred to above. We also are authorized by our Board 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 Bank’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 Bank 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. Once a quarter, our interest rate risk exposure is evaluated by
the Bank’s Board. Each year, our written investment policy is reviewed by the Board and appropriate changes are
made.
Supervision and Regulation
As a bank holding company, we are subject to supervision, examination, and regulation by the Federal Reserve and
the Commissioner. The Bank is also subject to supervision and examination by the Federal Reserve and the
Commissioner.
The Company and the Bank are subject to extensive regulation under federal and state laws. The regulatory
framework is designed to protect the banking system as a whole and not for the protection of our shareholders and
creditors.
The applicable statutes and regulations, as well as related policies, continue to be subject to changes by Congress,
state legislatures, and federal and state regulators. Changes in statutes, regulations, and polices applicable to
Company and the Bank (including their interpretations or implementation) cannot be predicted and could have a
material adverse impact on the business and operations of the Company and the Bank.
As a result of the Company’s acquisition of Select, its total assets at December 31, 2021 exceeded $10.0 billion.
Under current banking regulations and as discussed further below, banks exceeding this asset threshold are subject
to heightened supervision and regulation.
10
The following is a general summary of the material aspects of certain statutes, regulations and policies applicable to
us. This summary does not purport to be complete and is qualified by reference to the applicable statutes,
regulations, and policies.
Supervision and Regulation of the Company.
General. The BHC Act limits the business of a bank holding company to owning or controlling banks and engaging
in other activities closely related to the business of banking. In addition, the Company also must file reports with,
and provide additional information, to the Federal Reserve.
Holding Company Bank Ownership. The BHC Act requires every bank holding company to obtain the prior approval
of the Federal Reserve before: (1) acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such
shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
Holding Company Control of Non-banks. With some exceptions, the BHC Act prohibits a bank holding company
from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any
company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than
those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions
to these prohibitions involve certain non-bank activities that, by federal statute, agency regulation, or order, have
been identified as activities closely related to the business of banking or of managing or controlling banks.
Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the
Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in securities,
and on the use of securities as collateral for loans to any borrower. The Dodd-Frank Act further extended the
definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending, and
borrowing transactions as covered transactions under the regulations. It also (1) expands the scope of covered
transactions required to be collateralized; (2) requires collateral to be maintained at all times for covered
transactions required to be collateralized; and (3) places limits on acceptable collateral. These regulations and
restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds of
payments of dividends, interest, and operational expenses.
Tying Arrangements. The Company is prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, sale or lease of property, or furnishing of services. For example, with certain exceptions,
neither the Company nor the Bank may condition an extension of credit to a customer on either (1) a requirement
that the customer obtain additional services provided by the Company or the Bank; or (2) an agreement by the
customer to refrain from obtaining other services from a competitor.
Support of Bank Subsidiaries. Under Federal Reserve policy and the Dodd-Frank Act, the Company is required to
act as a source of financial and managerial strength to the Bank. This means that the Company is required to
commit, as necessary, capital and resources to support the Bank, including at times when the Company may not be
in a financial position to provide such resources or when it may not be in the Company’s or its shareholders’ best
interests to do so. Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to
deposits and to certain other indebtedness of the bank subsidiaries.
State Law Restrictions. As a North Carolina corporation, the Company is subject to certain limitations and
restrictions under applicable North Carolina corporate law. For example, North Carolina corporate law includes
limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions
involving directors, officers, or interested shareholders, maintenance of books, records, and minutes, and
observance of certain corporate formalities.
North Carolina Holding Company Law. 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.
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Supervision and Regulation of the Bank
General. The Bank is a North Carolina state-chartered bank and is a member of the Federal Reserve. 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 regulation by the Commissioner. The Commissioner has a wide
range of regulatory authority over the activities and operations of the Bank, and the Commissioner’s staff conducts
periodic examinations of the Bank and its affiliates to ensure compliance with state banking laws and regulations
and to assess the safety and soundness of the Bank. Among other things, the Commissioner regulates the merger
of state-chartered banks, the payment of dividends, loans to officers and directors, recordkeeping, types and
amounts of loans and investments, and the establishment of branches. The Commissioner also has cease and
desist powers over state-chartered banks for violations of state banking laws or regulations and for unsafe or
unsound conduct that is likely to jeopardize the interest of depositors.
The 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. The 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.
Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and
regulations that govern its relationships and interactions with consumers, including laws and regulations that impose
certain disclosure requirements and that govern the manner in which the Bank takes deposits, makes and collect
loans, and provides other services. In recent years, examination and enforcement by federal and state banking
agencies for non-compliance with consumer protection laws and regulations have increased and become more
intense. Failure to comply with these laws and regulations may subject the Bank to various penalties. Failure to
comply with consumer protection requirements may also result in failure to obtain any required regulatory approval
for merger or acquisition transactions we may wish to pursue.
Community Reinvestment. The CRA requires that, in connection with examinations of financial institutions within
their jurisdiction, federal bank regulators evaluate the record of financial institutions in meeting the credit needs of its
local communities, including low and moderate-income neighborhoods, consistent with the safe and sound
operation of those institutions. A bank's community reinvestment record is also considered by the applicable banking
agencies in evaluating mergers, acquisitions, and applications to open a branch or facility. In some cases, a bank's
failure to comply with the CRA or CRA protests filed by interested parties during applicable comment periods can
result in the denial or delay of such transactions.
Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to executive officers,
directors, principal shareholders, and their related interests. Extensions of credit 1) must be made on substantially
the same terms (including interest rates and collateral) and follow credit underwriting procedures that are at least as
stringent as those prevailing at the time for comparable transactions with persons not related to the lending bank;
and 2) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are
also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may
result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other
regulatory sanctions. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders
and generally prohibit loans to senior officers other than for certain specified purposes.
Regulation of Management. Federal law 1) sets forth circumstances under which officers or directors of a bank may
be removed by the bank's federal supervisory agency; 2) places restraints on lending by a bank to its executive
officers, directors, principal shareholders, and their related interests; and 3) generally prohibits management
personnel of a bank from serving as directors or in other management positions of another financial institution
whose assets exceed a specified amount or which has an office within a specified geographic area.
Safety and Soundness Standards. Certain non-capital safety and soundness standards also are imposed upon
banks. These standards cover, among other things, internal controls, information systems and internal audit
12
systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings, and stock valuation. In addition, each insured depository institution must
implement a comprehensive written information security program that includes administrative, technical, and
physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities.
The information security program must be designed to ensure the security and confidentiality of customer
information, protect against unauthorized access to or use of such information, and ensure the proper disposal of
customer and consumer information. An institution that fails to meet these standards may be required to submit a
compliance plan, or be subject to regulatory sanctions, including restrictions on growth.
Dividends
A principal source of the Company's cash is from dividends received from the Bank, which are subject to regulation
and limitation. As a general rule, regulatory authorities may prohibit banks and bank holding companies from paying
dividends in a manner that would constitute an unsafe or unsound banking practice. For example, regulators have
stated that paying dividends that deplete an institution's capital base to an inadequate level would be an unsafe and
unsound banking practice and that an institution generally should pay dividends only out of current operating
earnings. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital
below that necessary to meet minimum applicable regulatory capital requirements. Current guidance from the
Federal Reserve provides, among other things, that dividends per share on the Company's common stock generally
should not exceed earnings per share, measured over the previous four fiscal quarters. North Carolina banking law
also places limitations upon the payment of dividends by North Carolina banks.
Rules adopted in accordance with Basel III also impose limitations on the Bank's ability to pay dividends. In general,
these rules limit the Bank's ability to pay dividends unless the Bank's common equity conservation buffer exceeds
the minimum required capital ratio by at least 2.5% of risk-weighted assets.
The Federal Reserve has also issued a policy statement on the payment of cash dividends by bank holding
companies. In general, the policy statement expresses the view that although no specific regulations restrict
dividend payments by bank holding companies other than state corporate laws, a bank holding company should not
pay cash dividends unless the bank holding company's earnings for the past year are sufficient to cover both the
cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company's
capital needs, asset quality, and overall financial condition. A bank holding company's ability to pay dividends may
also be restricted if a subsidiary bank becomes under-capitalized. These various regulatory policies may affect the
Company's and the Bank's ability to pay dividends or otherwise engage in capital distributions.
Dodd-Frank Act
General. The Dodd-Frank Act was signed into law in July 2010 and it significantly changed the bank regulatory
structure and affects the lending, deposit, investment, trading, and operating activities of banks and bank holding
companies, including the Bank and the Company. Some of the provisions of the Dodd-Frank Act that impact the
Company's and the Bank's business and operations are summarized below.
Corporate Governance. The Dodd-Frank Act requires publicly traded companies to provide their shareholders with
1) a non-binding shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency
of such vote; 3) disclosure of "golden parachute" arrangements in connection with specified change in control
transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in connection with these
change in control transactions. In August 2015, the SEC adopted a rule mandated by the Dodd-Frank Act that
requires a public company to disclose the ratio of the compensation of its CEO to the median compensation of its
employees. This rule is intended to provide shareholders with information that they can use to evaluate a CEO's
compensation.
Consumer Financial Protection Bureau. The Dodd-Frank Act established the CFPB and empowered it to exercise
broad rulemaking, supervision, and enforcement authority for a wide range of consumer protection laws. Since the
Bank’s total consolidated assets exceeded $10 billion as of December 31, 2021, we now will be subject to the direct
supervision of the CFPB. The CFPB focuses on (i) risks to consumers and compliance with federal consumer
financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets,
(iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-
depository companies that offer one or more consumer financial products or services.
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The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks,
including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive
acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or
condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of
financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or
(iii) reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB can issue cease-and-
desist orders against banks and other entities that violate consumer financial laws. The CFPB also may institute a
civil action against an entity in violation of federal consumer financial law in order to impose a civil penalty or
injunction.
Interchange Fees. Under the Federal Reserve’s rules issued under the Durbin Amendment, banks with at least $10
billion in total consolidated assets are limited to a maximum permissible interchange fee for an electronic debt
transaction equal to the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction.
The rules also allow for an upward adjustment of no more than $0.01 to an issuer’s debit card interchange fee if the
issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention
standards.
Prior to December 31, 2021, the Company and the Bank qualified for the small issuer exemption from the Federal
Reserve’s interchange fees rules. As of December 31, 2021, however, the Company and the Bank exceeded $10
billion in total consolidated assets. Beginning July 1, 2022, the interchange fee limit is expected to have a $8.5
million - $9.0 million pre-tax annual impact on the Company’s earnings.
Inspections. The Federal Reserve conducts periodic inspections of bank holding companies, such as the Company.
In general, the objectives of the Federal Reserve's inspection program are to ascertain whether the financial
strength of a bank holding company is maintained on an ongoing basis and to determine the effects or
consequences of transactions between a bank holding company or its non-banking subsidiaries and its bank
subsidiaries. The inspection type and frequency typically varies depending on asset size, complexity of the
organization, and the bank holding company's rating at its last inspection.
Examinations. Banks are subject to periodic examinations by their primary regulators. In assessing a bank's
condition, bank examinations have evolved from reliance on transaction testing to a risk-focused approach. These
examinations are extensive and cover the entire breadth of the operations of a bank. Examinations alternate
between the federal and state bank regulatory agencies, and in some cases they may occur on a combined
schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and
its compliance and CRA ratings of its most recent examinations. However, the examination authority of the Federal
Reserve allows it to examine supervised institutions as frequently as deemed necessary based on the condition of
the institution or as a result of certain triggering events.
FDIC Insurance
As an FDIC insured depository institution, our deposits are insured up to applicable limits by the DIF of the FDIC.
The basic deposit insurance level is generally $250,000. 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 $2.7 million, $1.7 million, and $0.3 million in FDIC insurance expense in 2021, 2020,
and 2019, respectively. In November 2018, the FDIC announced that the 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 would be available to offset deposit
insurance assessments once the DIF reached 1.38%. The DIF reached 1.38% as of June 30, 2019 and therefore,
the FDIC began to apply the Bank’s credits to our quarterly deposit insurance assessments beginning with the
second quarter of 2019. Our credits became fully utilized during the first quarter of 2020. The Dodd-Frank Act made
banks with $10 billion or more in total assets, which threshold the Bank exceeded as of December 31, 2021,
14
responsible for the increase DIF ratio from 1.15% to 1.35%. Accordingly, we do not expect to receive any further
such credits.
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 Commissioner, the FDIC, the SEC, or 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.
Regulatory Capital Requirement under Basel III. The Company and the Bank are subject to the Basel III regulatory
capital rules adopted in 2013 and fully phased-in as of January 1, 2019.
Under Basel III, 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 credit 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 Company and the Bank are required to maintain 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 four ratios, it must ask for FDIC permission to originate
or renew brokered deposits.
Financial Privacy and Cybersecurity. The federal banking regulators have adopted rules that limit the ability of
banks and other financial institutions to disclose non-public information about consumers to non-affiliated third
parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow
consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations
affect how consumer information is transmitted through diversified financial companies and conveyed to outside
vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that
is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports
and asset and income information from applications. Consumers also have the option to direct banks and other
financial institutions not to share information about transactions and experiences with affiliated companies for the
purpose of marketing products or services.
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Under various policy statements, 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. Additionally, 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 October 2016, the federal banking regulators jointly issued an advance notice of proposed rulemaking on
enhanced cyber risk management standards that is intended to increase the operational resilience of large and
interconnected entities under their supervision.The advance notice of proposed rulemaking addressed five
categories of cyber standards: (i) cyber risk governance; (ii) cyber risk management; (iii) internal dependency
management; (iv) external dependency management; and (v) incident response, cyber resilience, and situational
awareness. In May 2019, the Federal Reserve announced that it would revisit the Advance Notice of Proposed
Rulemaking in the future. In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking
that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a
“computer-security incident” or a “notification incident.” The Notice of Proposed Rulemaking also would require
specific and immediate notifications by bank service providers that become aware of similar incidents.
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 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.
Anti-Money Laundering and the USA Patriot Act. The BSA requires all financial institutions to establish a risk-based
system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The
BSA also sets forth various recordkeeping and reporting requirements (such as reporting suspicious activities that
might signal criminal activity) and certain due diligence and "know your customer" documentation requirements.
The 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. Financial institutions are also
prohibited from entering into specified financial transactions and account relationships and must use enhanced due
diligence procedures in their dealings with certain types of high-risk customers and implement a written customer
identification program. Financial institutions must take certain steps to assist government agencies in detecting and
preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely
examine financial institutions for compliance with these obligations, and 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 financial, 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. Regulatory
authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating
these obligations.
The AML, which amends the BSA, was enacted in January 2021 and is intended to be a comprehensive reform and
modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based
approach to anti-money laundering compliance for financial institutions; requires the development of standards for
evaluating technology and internal processes for BSA compliance; and expands enforcement- and investigation-
related authority, including increasing available sanctions for certain BSA violations and instituting BSA
whistleblower incentives and protections.
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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 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 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. The Bank received a rating of
“satisfactory” in its most recent CRA examination.
In September 2020, the Federal Reserve released an Advanced Notice of Proposed Rulemaking, seeking public
comment on ways to modernize the Federal Reserve’s CRA regulations. The Advanced Notice of Proposed
Rulemaking requests feedback on ways to evaluate how banks meet the needs of low- and moderate-income
communities and to address inequities in credit access. We have and will continue to monitor the Federal Reserve’s
proposed changes and evaluate any impact on the Company, which will depend on the final form of any Federal
Reserve rulemaking and cannot be predicted at this time.
Incentive Compensation. In June 2010, the federal bank regulatory agencies issued comprehensive final guidance
on incentive compensation policies intended to ensure that the incentive compensation policies of financial
institutions do not determine the safety and soundness of such institutions by encouraging excessive risk-taking.
The "Interagency Guidance on Sound Incentive Compensation Policies," which covers all employees who have the
ability to materially affect the risk profile of a financial institution, either individually or as part of a group, is based
upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide
incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks,
(ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate
governance, including active and effective oversight by the financial institution’s board of directors.
Section 956 of the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint
regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities that
encourage inappropriate risk-taking by providing an executive officer, employee, director, or principal shareholder
with excessive compensation, fees, or benefits, or that could lead to material financial loss to the entity. The federal
bank regulatory agencies issued such proposed rules in March 2011 and issued a revised proposed rule in June
2016 implementing the requirements and prohibitions set forth in Section 956. The revised proposed rule would
apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, for which it
would go beyond the existing "Interagency Guidance on Sound Incentive Compensation Policies" to (i) prohibit
certain types and features of incentive-based compensation arrangements for senior executive officers, (ii) require
incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of
encouraging inappropriate risk, (iii) require appropriate board or committee oversight, (iv) establish minimum
recordkeeping, and (v) mandate disclosures to the appropriate federal bank regulatory agency. These proposed
rules have not yet been finalized.
Federal Securities Laws. The common stock of the Company is registered with the SEC under the Exchange Act
and 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.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and
state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by
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or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to
their regulations or change the manner in which existing regulations are applied. The substance or impact of
pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the
proposed legislation could impact the regulatory structure under which we operate and may significantly increase
costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require
modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner.
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, as well as 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.
Item 1A. Risk Factors
In addition to other information contained in this Annual Report that may affect us, the risk factors described below,
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
The COVID-19 (including variants of the virus) pandemic has impacted the local economies in the
communities we serve and our business.
The COVID-19 pandemic has negatively impacted the local, national, and global economies, disrupted global
supply chains, increased unemployment, and created significant volatility and disruption in financial markets. The
duration of the COVID-19 pandemic and its effects cannot be determined with certainty, but the effects could be
present for an extended period of time.
Since the onset of the pandemic, and as needed for spikes in infection rates, the majority of state and local
jurisdictions have imposed, and others in the future may impose, varying levels of restrictions, including “shelter-in-
place” orders, quarantines, executive orders and similar government orders to control the spread of COVID-19 and
its variants.
At its height, the COVID-19 pandemic and the institution of social distancing and sheltering-in-place requirements
resulted in temporary closures of, or operating restrictions, on many businesses. While many of the closed
businesses have reopened at varying levels of capacity, the occurrence of variants of the COVID-19 virus may
result in future restrictions or closures. As a result, the demand for our products and services may be significantly
impacted. Furthermore, the COVID-19 pandemic has influenced and may continue to influence the recognition of
credit losses in our loan portfolios and our allowance for credit losses, particularly as some businesses remain
closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance
their businesses. Our operations may also be disrupted if significant portions of our workforce are unable to work
effectively, including due to illness, quarantines, government actions, or other restrictions in connection with the
COVID-19 pandemic.
The economies of our market areas generally improved during 2021 as they recovered from the pandemic.
However, the ongoing impact on the Company of the continuing pandemic, including infection rate spikes and new
strains of COVID-19, is uncertain. The extent to which the COVID-19 virus and its variants have a further impact on
our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will
depend on future developments, which are highly uncertain and cannot be predicted, including the scope and
duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in
response to the COVID-19 pandemic.
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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. 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. While economic growth and business activity has been generally favorable in our market area in recent
years, there can be no assurance that economic conditions will persist, and these conditions could worsen.
Unfavorable global economic conditions may have a negative impact on financial markets and could adversely
impact our customers, which in turn could lead to lower business activity and higher loan delinquencies. Additionally,
financial markets may be adversely affected by the current or anticipated impact of military conflict, including
continuing hostilities between Russia and Ukraine, terrorism or other geopolitical events. 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 credit losses may not be adequate to cover actual losses; under CECL our provisions for
credit losses may increase significantly and the provisions for credit losses may be more volatile than in
the past.
Like all financial institutions, we maintain an allowance for credit losses to provide for expected losses caused by
customer loan defaults. The ACL may not be adequate to cover actual loan losses, and in this case additional and
larger provisions for loan losses would be required to replenish the allowance. Provisions for loan losses are a direct
charge against income.
We adopted CECL as of January 1, 2021. Under the CECL model, credit deterioration is 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. The CECL framework
is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the
composition, characteristics, and quality of the Company's loan portfolio, as well as the prevailing economic
conditions and forecasts. We establish the amount of the ACL based on our current estimate of credit losses for the
remaining estimated lives of loans in our portfolio. Because of the extensive use of estimates and assumptions, our
actual loan losses could differ, possibly significantly, from our estimate. We believe that our ACL at December 31,
2021 is adequate to provide for expected losses, but it is possible that the ACL will need to be increased for
changes in economic forecasts, credit deterioration, or that regulators will require us to increase this allowance. An
increase in the ACL could materially and adversely affect our earnings and profitability.
The CECL standard provides significant flexibility and requires a high degree of judgment with regards to pooling
financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to
develop an estimate of expected lifetime losses. It also may result in small changes to future forecasts having a
significant impact on the allowance, which could make the allowance more volatile, and regulators may impose
additional capital buffers to absorb this volatility.
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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 and creditors. 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 credit losses. Changes in the regulations that apply to us, or changes in our compliance with
regulations, could have a material impact on our operations.
Various federal banking laws and regulations imposed heightened requirements on certain large banks and bank
holding companies with at least $50 billion in total consolidated assets, but certain of these requirements also apply
to banks and bank holding companies with at least $10 billion in total consolidated assets. The Company and the
Bank exceeded this $10 billion threshold as of December 31, 2021. Among the consequences of the circumstance
are the following:
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the Bank will calculate its FDIC deposit using a “score card” system using forward-looking measures
intended to assess the risk to the DIF;
under the Federal Reserve’s rules pursuant to the Durbin Amendment, the Bank is no longer exempt from
the Federal Reserve interchange fee maximum and may charge a fee only up to the maximum level
determined by the Federal Reserve to be reasonable and proportionate;
the Bank will be subject to a continuous supervision model in addition to an annual safety and soundness
examination; and
the Bank will be examined primarily by the CFPB for compliance with federal consumer protection laws.
We face a risk of noncompliance with the BSA and other AML statutes and regulations and related
enforcement actions.
The BSA, 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 BSA, 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 with 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 focus on compliance with BSA 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 also could have
serious reputational consequences for us.
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.
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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 always will be present given the nature of our business.
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 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, 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, including 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. 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. 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 from these or 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
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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, 2021 of
$364.3 million. Under GAAP, 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 two reporting units – 1) the Bank with $360.0 million in
goodwill (including goodwill at the holding company level), and 2) 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 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. For this reason or other reasons that indicate that the
goodwill at any of our reporting units is impaired, we could 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.
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 LIBOR and that from January 1, 2022, publications of most LIBOR
rates would end. As of this date, LIBOR cannot be used as a reference for new loan originations or other
transactions. Currently, many LIBOR rates, including the one-week and two-month settings are no longer available,
while the remaining LIBOR rates will be completely phased out by June 30, 2023.
Regulators, industry groups, and others have, among other things, published recommended replacement language
for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g. the
Secured Overnight Financing Rate), and proposed implementations of the recommended alternatives in floating rate
instruments. There is not yet consensus on what recommendations and proposals will be broadly accepted. 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. Since proposed alternative
rates are calculated differently, payments under contracts referencing new rates will differ from those referencing
LIBOR. The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation
tools, product design, and hedging strategies. 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.
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 CFPB,
and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may
also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.
A successful challenge to our performance under the fair lending laws and regulations could adversely impact our
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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.
Focus on commercial loans may increase the risk of substantial credit losses.
We offer a variety of loan products, including residential mortgage, consumer, construction, and commercial loans.
At December 31, 2021, approximately 64% of loans were commercial and industrial loans and commercial loans
secured by commercial real estate. It is expected that, as we grow, this percentage will remain fairly constant.
However, future acquisitions of banks with a portfolio composition different from ours could cause this mix to
change. Commercial lending generally involves more risk than mortgage and consumer lending because loan
balances are greater, and the borrower's ability to repay is contingent on the successful operation of a business.
Risk of loan defaults is unavoidable in the banking industry. We attempt to limit exposure to this risk by monitoring
carefully the amount of loans in specific industries and by exercising prudent lending practices. However, the risk
that substantial credit losses could result in reduced earnings or losses cannot be eliminated.
The Company's focus on lending to small- to mid-sized community-based businesses may increase its
credit risk.
Most of our commercial business and commercial real estate loans are made to small business or middle-market
customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity
than larger entities and have a heightened vulnerability to economic conditions. Additionally, these loans may
increase concentration risk as to industry or collateral securing our loans. If general economic conditions in the
market areas in which we operate negatively impact this important customer sector, our results of operations and
financial condition may be adversely affected. Moreover, a portion of these loans has been made by the Company
recently, and the borrowers may not have experienced a complete business or economic cycle. The deterioration of
the borrowers' businesses may hinder their ability to repay their loans with the Company, which could have a
material adverse effect on our financial condition and results of operations.
We could experience losses due to competition with other financial institutions and non-banks.
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:
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the ability to develop, maintain, and build upon long-term customer relationships based on top quality
service, high ethical standards, and safe, sound assets;
the ability to expand our market position;
the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
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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. We may invest significant time and resources in these efforts. 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.
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 GAAP and reflect management’s judgment of the most appropriate
manner to report our financial condition and results. In some cases, management must select the accounting policy
or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet
may result in reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results. They require management
to make difficult, subjective, or complex judgments about matters that are uncertain. Materially different amounts
could be reported under different conditions or using different assumptions or estimates. These critical accounting
policies include: the allowance for credit losses; business combinations, and goodwill and other intangible assets.
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 to accurately track and record our assets and liabilities. Any
failure, interruption, or breach in security of our computer systems or outside technology could result in failures or
disruptions in general ledger, deposit, loan, customer relationship management, and other systems leading to
inaccurate financial records. 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
24
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, changes in the vendor’s organizational structure,
changes in the vendor’s financial condition, and changes in the vendor’s support for existing products and services.
While we believe these policies and procedures help to mitigate risk, and our vendors are not the sole source of
service, the failure of an external vendor to perform in accordance with applicable contractual arrangements or the
service level agreements could be disruptive to our operations, which could have a material adverse impact on our
business and its financial condition and results of operations.
We are subject to losses due to errors, omissions, or fraudulent behavior by our employees, clients,
counterparties, or other third parties.
We are exposed to many types of operational risk, including the risk of fraud by employees and third parties, clerical
recordkeeping errors, and transactional errors. Our business is dependent on our employees as well as third-party
service providers to process a large number of increasingly complex transactions. We could be materially and
adversely affected if employees, clients, counterparties, or other third parties caused an operational breakdown or
failure, either as a result of human error, fraudulent manipulation, or purposeful damage to any of our operations or
systems.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely
on information furnished to us by or on behalf of clients and counterparties, including financial statements and other
financial information, which we do not independently verify. We also may rely on representations of clients and
counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on
reports of independent auditors. 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 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.
25
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 on NASDAQ 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 or other volatility in our shares in the
public market, 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.
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, branch locations, and
companies that provide products and services related to our banking activities. Such transactions could have a
material effect on our operating results and financial condition, including short- and long-term liquidity, and 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.
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; using inaccurate estimates and judgments to evaluate credit,
operations, management, and market risks with respect to the target institution or assets; incurring the time and
expense required to integrate the operations and personnel of the combined businesses; the possibility that we will
be unable to successfully implement integration strategies due to challenges associated with integrating complex
systems, technology, banking centers, and other assets of the acquired bank in a manner that minimizes any
adverse effect on customers, suppliers, employees, and other constituencies; the possibility of regulatory approval
for the acquisition being delayed, impeded, restrictively conditioned or denied due to existing or new regulatory
issues surrounding the Company, the target institution or the proposed combined entity; and losing key employees
and customers as a result of an acquisition that is poorly received.
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, 2021, we had 35,629,177 shares of common stock outstanding. In addition, at that date, we had
reserved for issuance 445,231 shares of common stock pursuant to options and restricted stock under our existing
equity compensation plan.
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,
including 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.
Risks associated with acquisitions and the resulting integrations may affect costs, revenues, and market
value.
A component of our business strategy includes growth through acquisitions. Costs or difficulties related to
integrating the acquired business with the Company might be greater than expected. Further, expected revenue
and/or operational synergies and cost savings associated with pending or recently completed acquisitions may not
be fully realized or realized within the expected time frame.
26
Attractive acquisition or expansion opportunities may not be available to us in the future.
We may consider acquiring other businesses or expanding into new product lines or markets that we believe will
help us fulfill our strategic objectives. We expect that other banking and financial companies, some of which have
significantly greater resources, will compete with us to acquire financial services businesses. Our target base of
attractive candidates may be limited, and competition could increase prices for potential acquisitions that we believe
are attractive. Acquisitions may also be subject to various regulatory approvals. If we fail to receive the appropriate
regulatory approvals, we will not be able to consummate acquisitions that we believe are in our best interests.
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 that 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 buildings in Greensboro, North Carolina and Troy, North Carolina,
which are owned by the Bank. At December 31, 2021, the Company operated 121 bank branches. The Company
owned all of its bank branch premises except 17 branch offices for which the land and buildings are leased and 10
branch offices for which the land is leased but the building is owned. The Bank also leases several other office
locations for administrative functions. We also lease several locations for our SBA related activities. 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.
27
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 NASDAQ under the trading symbol “FBNC.” Tables have been included in Item 7
under the heading, "Selected Consolidated Financial Data," which provide historic information on the market price
for the Company’s common stock. As of December 31, 2021, there were approximately 3,210 shareholders of
record and another 13,358 shareholders whose stock is held in “street name.”
These tables in Item 7 also include information regarding cash dividends declared per share of common stock for
the annual and quarterly periods presented. For each quarter in 2021, we declared a cash dividend of $0.20 per
common share. For the foreseeable future, it is our current intention to continue to pay regular cash dividends on a
quarterly basis. However, our ability to pay future cash dividends can be restricted or eliminated by regulatory
authorities. See Note 15 to the Consolidated Financial Statements and "Capital Resources and Shareholders'
Equity" section in Item 7 for additional discussion.
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the five-
year period commencing December 31, 2016 and ending December 31, 2021, with the cumulative total return of the
Russell 2000 Index (reflecting overall stock market performance of small-capitalization companies), and the S&P
Regional Banks Select Industry Index, as constructed by SNL Securities, LP (reflecting changes in banking industry
stocks). The graph and table assume that $100 was invested on December 31, 2016 in each of the Company’s
common stock, the Russell 2000 Index, and the S&P Regional Bank Index, and that all dividends were reinvested.
28
First Bancorp Comparison of Five-Year Total Return Performances (1)
Five Years Ending December 31, 2021
Total Return Index Values (1)
December 31,
First Bancorp
Russell 2000
$
100.00
100.00
131.41
114.65
122.88
102.02
152.38
128.06
133.16
153.62
183.31
176.39
2016
2017
2018
2019
2020
2021
S&P Regional Banks Select
Industry Index
_____________
100.00
107.95
87.69
111.92
103.98
145.47
(1) Total return indices were provided from an independent source, SNL Securities LP, Charlottesville, Virginia, and
assume initial investment of $100 on December 31, 2016, reinvestment of dividends, and changes in market
values. Total return index numerical values used in this example are for illustrative purposes only.
29
Issuer Purchases of Equity Securities
Pursuant to authorizations by the Board, the Company has from time to time repurchased shares of common stock
in private transactions and in open-market purchases.
Issuer Purchases of Equity Securities
Total Number of
Shares
Purchased
Average Price
Paid Per Share
Total Number of
Shares
Purchased as Part of
Publicly Announced
Plans
or Programs (1)
Maximum Number of
Shares (or
Approximate Dollar
Value)
That May Yet Be
Purchased
Under the Plans or
Programs
(1)
— $
—
—
— $
—
—
—
—
— $
15,964,472
—
—
— $
15,964,472
—
—
Period
Month #1 (October 1, 2021 to
October 31, 2021)
Month #2 (November 1, 2021 to
November 30, 2021)
Month #3 (December 1, 2021 to
December 31, 2021)
Total
___________________
(1) All shares available for repurchase are pursuant to publicly announced share repurchase authorizations.
On January 27, 2021, the Company reported the authorization of a $20 million repurchase program which
expired on December 31, 2021. On February 7, 2022 the Company reported the authorization of a $40
million repurchase program with an expiration date of December 31, 2022.
Also see “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 12.
Item 6. Reserved.
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 included in Item 8 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 and 2021 Highlights
The Company is a financial holding company headquartered in Southern Pines, North Carolina. We provide
diversified financial services primarily though our principal subsidiary, First Bank, including commercial and
consumer banking services, mortgage lending, SBA lending, accounts receivable financing, and investment
advisory services. As of December 31, 2021, the Bank had a 121 branch network throughout North Carolina and
South Carolina and 1,207 full-time equivalent employees. We have grown organically as well as through strategic
acquisitions.
On October 15, 2021, we acquired Select which was headquartered in Dunn, North Carolina and operated through
22 branches in North Carolina, South Carolina, and Virginia. As of the acquisition date, Select had total assets of
$1.8 billion, total loans of $1.3 billion, and total deposits of $1.6 billion. The conversion of Select’s core processing
and related systems to the Bank’s systems will occur in March 2022. Until such time, Select branches will continue
to operate under their current name.
The merger with Select, combined with organic growth over the year, resulted in significant growth to assets,
liabilities and equity during 2021. Our total assets at December 31, 2021 were $10.5 billion, a 44.2% increase from
a year earlier; total loans increased $1.4 billion to total $6.1 billion at December 31, 2021, and deposits grew $2.9
billion from the prior year end to total $9.1 billion.
30
We earned net income of $95.6 million, or $3.19 diluted EPS, during 2021 compared to net income of $81.5 million,
or $2.81 diluted EPS, in 2020. The main drivers to the increase in net income are as follows:
•
•
•
•
•
•
•
Net interest income increased $28.3 million, or 13%, due to the combination of both higher interest income
and lower interest expense. The NIM on a tax-equivalent basis was 3.16% for 2021, a decrease of 41 basis
points from 2020. The growth in average earning assets offset the decline in yields.
Interest income was a primary driver of higher net interest income and included a $5.9 million increase in
interest income from loans and a $13.3 million increase in interest income from investment securities. Loan
interest income was up related to the $315.6 million increase in average volume of loans driven by both
organic growth and the Select acquisition. The increase in interest income from investment securities was
due to higher average balances, which increased $1.4 billion in 2021, related to our decision to invest
excess liquidity, which arose from high deposit growth, into investment securities.
Reduced interest expense of $10.0 million also contributed to the the improved net interest income. We
continued to reprice deposits downward given the low interest rate environment and lowered the cost of
interest-bearing deposits by 27 basis points to 0.17% for 2021. Our total cost of deposits declined to 0.13%
from 0.50% in 2020. The effects from the decline in funding costs were partially offset by an increase in
average balance in interest-bearing liabilities.
Provision for loans losses of $9.6 million was down from the $35.0 million provision in 2020 due to
improving asset quality and improving economic forecasts which are factors in our CECL model
calculations. The higher provision in 2020 was driven by historical estimates of probable losses incurred in
the portfolio taking into consideration the impact of the COVID-19 pandemic on the overall economic
environment and the potential impact on our loan portfolio. The provision for 2021 was related to the initial
ACL for Select's non-PCD loans acquired of $14.1 million. Partially offsetting the initial Select provision, we
reduced our ACL reserves $4.5 million during the year due to the economic forecast improvements in 2021.
Noninterest income declined $7.7 million, which resulted primarily from a $3.2 million decrease in mortgage
banking income related to lower levels of activity, a $1.9 million decrease in commissions on sales of
financial and insurance products due to the sale of the majority of the assets of First Bank Insurance mid-
year, and a loss of $1.2 million on security sales as compared to a gain of $8.0 million in 2020. Partially
offsetting these reductions were higher levels of transactions and number of accounts generating service
charge income and bankcard revenue. (See Noninterest Income section below for further discussion).
Noninterest expense increased $23.4 million, primarily related to $16.8 million in merger expenses related
to the Select acquisition. Also related to the Select acquisition were incremental costs of $2.3 million in
personnel expense and $4.7 million in higher operating costs. (See Noninterest Expense section below for
further discussion).
Income tax expense was up $3.0 million relative to the higher pre-tax income. The effective tax rate of
20.5% was fairly consistent with the prior year.
Total loans amounted to $6.1 billion at December 31, 2021, an increase of $1.4 billion, or 28.5% from December 31,
2020. Core legacy loan growth for the year ended December 31, 2021, which we define as growth exclusive of
PPP loans and loans acquired from Select, amounted to $382.8 million, a growth rate of 8.6%. A combination of low
interest rates and economic recovery from the pandemic contributed to our 2021 core loan growth. Also contributing
to our core growth is a continued focus on expansion in high-growth markets, hiring experienced bankers, and
providing high levels of service to achieve growth.
The ACL on loans increased $26.4 million from the balance of $52.4 million at December 31, 2020. The increase in
the ACL on loans was mainly due to a $14.6 million allowance recorded at adoption of the CECL standard as of
January 1, 2021. The other driver was the Select loans acquired requiring a $4.9 million allowance recorded on the
PCD loans and $14.1 million allowance on the initial provision for credit losses for the non-PCD loans. The ACL was
1.30% of total loans at December 31, 2021. With our adoption of CECL,we increased the allowance for unfunded
commitments by $7.5 million. We also recorded an initial allowance on unfunded commitments of $3.9 million with
the acquisition of Select.
Our asset quality remained strong in 2021. At December 31, 2021, net charge offs as a percentage of average
loans was 0.05% as compared to 0.09% for the prior year. The total NPAs of $52.6 million were 0.50% of total
31
assets at December 31, 2021. Total nonperforming assets increased $11.9 million in the fourth quarter of 2021 as a
result of the acquisition of Select.
We continue to deploy excess liquidity into investment securities, which amounted to $3.1 billion at December 31,
2021, an increase of $1.5 billion, or 94.0%, compared to a year earlier.
Total deposits amounted to $9.1 billion at December 31, 2021, an increase of $2.9 billion, or 45.4%, from December
31, 2020. Core legacy deposit growth for the year ended December 31, 2021, which we define as organic growth
exclusive of deposits acquired from Select, totaled $1.35 billion, a growth rate of 21.5%. The high core deposit
growth is believed to be due to a combination of stimulus funds and changes in customer behaviors during the
pandemic, as well as ongoing growth initiatives by the Company. We continue to emphasize relationship banking to
new and existing customers and continually work to identify and introduce new products that will attract and retain
customers.
We remain well-capitalized by all regulatory standards, with a total capital ratio at December 31, 2021 of 14.67%
compared to 15.37% reported at December 31, 2020. The Company’s TCE ratio was 8.38% at December 31, 2021,
a decrease of 70 basis points from a year earlier, with the decline resulting from the acquisition of Select and the
high balance sheet growth experienced in 2021.
Impact of COVID-19
Overview. Our business has been, and continues to be, impacted by COVID-19 and its variants. While the
economies of our markets have generally improved in 2021, the current pandemic is ongoing and dynamic in
nature, and there are many related uncertainties, including, among other things, its severity and new variants that
may arise; its ultimate duration and infection spikes that may occur; the impact on our customers, employees and
vendors; the impact on the financial services and banking industry; and the ongoing impact on the economy as a
whole.
Impact on our Operations. At the height of the pandemic, many jurisdictions in North Carolina in which we operate
declared health emergencies related to COVID-19. The resulting closures and/or limited operations of non-essential
businesses and related economic disruption impacted our operations as well as the operations of our customers.
While most businesses have reopened and restrictions are currently limited in our areas, the occurrence of variants
of the COVID-19 virus may result in future restrictions or closures. We continue to address the issues as they arise
in order to facilitate the continued delivery of essential services while maintaining a high level of safety for our
customers as well as our employees, including:
•
•
•
•
Implementing our communications plans to ensure our employees, customers and critical vendors are kept
abreast of developments affecting our operations;
Temporarily closing financial center lobbies, limiting access to drive-through only or by appointment, as
necessary given spikes in COVID-19 infection rates or due to staffing constraints;
Expanding remote-access availability so that a significant portion of our workforce has the capability to work
from home or other remote locations. All activities are performed in accordance with our compliance and
information security policies designed to ensure customer data and other information is properly
safeguarded; and
Instituting mandatory social distancing policies and mask protocols for those employees not working
remotely and who are unvaccinated. Members of certain operations teams may split into two teams that
rotate their work location between work and home as necessary.
Impact on our Financial Position and Results of Operations. Our financial position and results of operations are
particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce,
the availability of our vendors, and the decline in the value of assets held by us. The impact of the COVID-19
pandemic lessened in 2021, and we experienced increased commercial activity throughout our market areas. We
have not realized significant negative impact on our loan portfolio or asset quality. Further, all COVID-19 deferral
status loans have returned to regular payment schedules. While the economic pressures and uncertainties arising
from the COVID-19 pandemic have resulted in, and may continue to result in, specific changes in consumer and
business spending and borrowing habits, we have seen improvements in many industries in which we have loan
exposure including retail/strip centers, hotels/lodging, restaurants, entertainment, and commercial real estate. See
further information related to the risk exposure of our loan portfolio under the sections captioned "Provision for
Credit Losses," “Loans,” and “Allowance for Credit Losses” elsewhere in this discussion.
32
Legislative and Regulatory Developments. The federal government and the Federal Reserve and other bank
regulatory agencies have taken actions to mitigate the economic effects of COVID-19. The Federal Reserve
lowered the target for the federal funds rate to a range of between zero to 0.25% effective in March 2020. Recently,
in response to inflationary concerns, the Federal Reserve indicated that it expects to increase the targeted federal
funds rate during 2022. Our earnings and cash flows are largely dependent on our net interest income, as is
discussed in detail below under "Interest Rate Risk." Increasing short term rates could negatively impact our NIM if
funding costs rise.
Banks and bank holding companies have been particularly impacted by the COVID-19 pandemic as a result of
disruption and volatility in the global capital markets. Bank regulatory agencies have been (and are expected to
continue to be) proactive in responding to both market and supervisory concerns arising from the COVID-19
pandemic and its aftermath, as well as the potential impact on customers, especially borrowers. We continue to
monitor any potential for new laws and regulations impacting lending and funding practices as well as capital and
liquidity standards. Such changes could require us to maintain more capital, with common equity as a more
predominant component, or manage the composition of our assets and liabilities to comply with formulaic liquidity
requirements.
As discussed above, the economies of our market areas generally improved during 2021 as they recovered from
the pandemic. However, the ongoing impact on the Company of the continuing pandemic, including infection rate
spikes and new strains of COVID-19, is uncertain. The extent to which the COVID-19 pandemic has a further
impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity
ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope
and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in
response to the COVID-19 pandemic.
Critical Accounting Policies and Estimates
The accounting principles we follow and our methods of applying these principles conform with GAAP and with
general practices followed by the banking industry. Certain policies inherently have a greater reliance on the use of
estimates, assumptions, or judgments and as such, have a greater possibility of producing results that could be
materially different than originally reported. We have identified the determination of our ACL, business combinations
and related fair value measurements, and intangible assets to be the accounting areas that require the most
subjective or complex judgments, estimates, and assumptions, and where changes in those judgments, estimates,
and assumptions (based on new or additional information, changes in the economic climate and/or market interest
rates, etc.) could have a significant effect on our financial statements.
Our most significant accounting policies are presented in Note 1 to the accompanying consolidated financial
statements. These policies, along with the disclosures presented in the other notes to the consolidated financial
statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial
statements and how those values are determined.
Allowance for Credit Losses on Loans and Unfunded Commitments
The ACL replaces the allowance for loan and lease losses as a credit accounting estimate as of January 1, 2021,
when we adopted ASU 2016–13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. The ACL represents management’s current estimate of credit losses for the remaining
estimated life of financial instruments. We perform periodic and systematic detailed reviews of the loan portfolio to
identify trends and to assess the overall collectability of the portfolio. We believe the accounting estimate related to
the ACL is a “critical accounting estimate” as: (1) changes in it can materially affect the provision for loan and lease
losses and net income; (2) it requires management to predict borrowers’ likelihood or capacity to repay, including
evaluation of inherently uncertain future economic conditions; (3) the value of underlying collateral must be
estimated on collateral-dependent loans; (4) prepayment activity must be projected to estimate the life of loans that
often are shorter than contractual terms; and (5) it requires estimation of a reasonable and supportable forecast
period for credit losses. Accordingly, this is a highly subjective process and requires significant judgment since it is
difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the
timing and extent of loss events that are expected to occur prior to end of a loan’s estimated life.
Our ACL is assessed at each balance sheet date and adjustments are recorded in the provision for loan losses. The
ACL is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable
economic forecast, and assumptions of probability of default and loss given default. Loan balances considered
33
uncollectible are charged-off against the ACL. There are many factors affecting the ACL, some of which are
quantitative, while others require qualitative judgment. Although management believes its process for determining
the allowance adequately considers all the potential factors that could potentially result in credit losses, the process
includes subjective elements and is susceptible to significant change. To the extent actual outcomes differ from
management estimates, additional provision for loan losses could be required that could adversely affect our
earnings or financial position in future periods.
PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration
since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked
directly to the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit
losses.
We believe that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and
leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. For example,
the impact of COVID–19 on both borrower credit and the greater macroeconomic environment is uncertain and
changes in the duration, spread, and severity of the virus could affect our loss experience.
Additional information on the loan portfolio and ACL can be found in the sections of MD&A titled “Nonperforming
Assets” and “Allowance for Credit Losses and Loan Loss Experience” below.
Business Combinations
Pursuant to applicable accounting guidance, we recognize assets acquired, including identified intangible assets
(discussed further below), and the liabilities assumed in acquisitions at their fair values as of the acquisition date,
with the related transaction costs expensed in the period incurred. Specified items such as acquired operating lease
assets and liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in
accordance with accounting guidance that results in measurements that may differ from fair value. Determining the
fair value of assets acquired and liabilities assumed often involves estimates based on internal or third-party
valuations which include appraisals, discounted cash flow analysis, or other valuation techniques that may include
estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples of earnings, or other relevant
factors. The determination of fair value may require us to make point-in-time estimates about discount rates, future
expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to
assess. While we use the best estimates and assumptions to accurately value assets acquired and liabilities
assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income.
Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense
(or reversal of provision expense) in subsequent periods as they arise. The ACL for non-PCD assets is recognized
as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired
loans are determined using methodologies and applying estimates and assumptions that were described previously
in the Allowance for Credit Losses section.
Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with
assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual
cash flows on these loans could differ materially from the fair value estimates. The amount 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. Discounts on acquired non-PCD loans are
amortized to interest income over their estimated remaining lives, which may include prepayment estimates in
certain circumstances.
Similarly, premiums or discounts on acquired debt are amortized to interest expense over their remaining lives.
Actual accretion or amortization of premiums and discounts from a business acquisition may differ materially from
our estimates impacting our operating results.
Goodwill and Other Intangible Assets
We believe that the accounting for goodwill and other intangible assets also involves a higher degree of judgment
than most other significant accounting policies. ASC 350-10 establishes standards for the amortization of acquired
intangible assets, generally over the estimated useful life of the related assets, and impairment assessment of
34
goodwill. At December 31, 2021, we had core deposit and other intangibles of $17.8 million subject to amortization
and $364.3 million of goodwill, which is not subject to amortization.
Goodwill arising from business combinations represents the excess of the purchase price over the sum of the
estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the
liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently
if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the
extent that the carrying amount exceeds the asset’s fair value.
At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment.
During 2020, with the heightened economic uncertainty and volatility surrounding COVID–19, we performed
quarterly impairment assessments. Generally, absent potential impairment indicators, we perform an annual
assessment of whether the events and circumstances resulted in it being more likely than not that the fair value of
any reporting unit was less than its carrying value. Impairment indicators considered include the condition of the
economy and banking industry; government intervention and regulatory updates; the impact of recent events to
financial performance and cost factors of the reporting unit; performance of the Company's stock, and other relevant
events. During 2021 there were no triggers warranting interim impairment assessments and for the 2021 annual
assessment, we concluded that it was more likely than not that the fair value exceeded its carrying value.
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 intangibles which represent the estimated value of the long-term deposit
relationships acquired in the transaction. 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. The core deposit intangibles are amortized
over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates
the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for
reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an
accelerated rate of amortization. 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.
Recent Accounting Standards and Pronouncements
For information relating to recent accounting standards and pronouncements, see Note 1 to our consolidated
financial statements entitled “Summary of Significant Accounting Policies.”
RESULTS OF OPERATIONS
The following discussion reviews the results of operations and key drivers to change in the results of 2021 as
compared to 2020. For a description of our results of operations for 2020, refer to the "Overview - 2020 Compared
to 2019" section of Item 7 in our 2020 Form 10-K.
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-
earning assets (generally loans and investment securities) and the interest expense incurred in connection with
interest-bearing liabilities (generally deposits and borrowed funds). Changes in the net interest income are the result
of changes in volume and the net interest spread which affects NIM. Volume refers to the average dollar levels of
interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the
average yield on interest-earning assets and the average cost of interest-bearing liabilities. NIM refers to net interest
income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities. Net interest income is also influenced by external factors such as local
economic conditions, competition for loans and deposits, and market interest rates.
Net interest income amounted to $246.4 million in 2021, an increase of $28.3 million, or 11.5%, from the $218.1
million in 2020. The increase was due in part to the Select acquisition and higher balances of investment securities,
which more than offset the impact of the challenging rate environment. For 2021, average interest-earning assets
35
increased $1.7 billion, or 27.8%, including growth of $315.6 million in average loans and $1.4 billion in average
securities. The growth in interest-earning assets was driven by funds provided from growth in deposits. The Select
acquisition in the fourth quarter also contributed to higher earning assets.
The impact on earnings of the interest-earning asset growth was partially offset by a decrease in our NIM on a tax-
equivalent basis, which declined from 3.56% in 2020 to 3.16% in 2021. For internal purposes, we evaluate our NIM
on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest
income then dividing by total average earning assets. We believe that analysis of NIM on a tax-equivalent basis is
useful and appropriate because it allows a comparison of net interest in different periods without taking into account
the different mix of taxable versus non-taxable loans and investments that may have existed during those periods.
The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the
resulting NIM as reported and on a tax-equivalent basis.
($ in thousands)
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
Net interest margin, as reported
Net interest margin, tax-equivalent
Year ended December 31,
2021
246,395
2,243
248,638
$
$
3.13 %
3.16 %
2020
218,122
1,468
219,590
3.54 %
3.56 %
2019
216,204
1,641
217,845
3.97 %
4.00 %
The reduction in our NIM was in large part a result of excess liquidity, as well as the impact of lower interest rates.
While there were no interest rate reductions initiated by the Federal Reserve during 2021, the overall lower market
rates impacted our portfolio yields on new and renewing assets. During 2021, our level of average securities and
other short-term investments increased by $1.4 billion, or 95.8% at lower market yields, generally less than 1.50%,
thus negatively impacting the NIM.
Our NIM for all periods benefited, by varying amounts, from the net accretion income, primarily associated with
purchase accounting premiums/discounts associated with acquisitions. Presented in the table below is the amount
of accretion which increased net interest income in each year.
($ in thousands)
Year Ended
December 31,
2021
Year Ended
December 31,
2020
Year Ended
December 31,
2019
Interest income – increased by accretion of loan discount on acquired
loans
$
6,107
3,817
4,588
Interest income - increased by accretion of loan discount on retained
SBA loans
Interest expense – reduced by premium amortization of deposits
Interest expense – increased by discount accretion of borrowings
Impact on net interest income
$
2,707
295
(249)
8,860
2,511
100
(181)
6,247
1,386
190
(181)
5,983
The biggest component of the purchase accounting adjustments in each year was loan discount accretion on
purchased loans. The increase in 2021 was driven by the acquisition of Select which resulted in $1.5 million in
accretion during the fourth quarter of 2021, combined with $2.3 million in accelerated accretion earlier in the year
from the payoff of several former failed-bank loans we previously acquired. Generally the level of loan discount
accretion will decline each year due to the natural paydowns in acquired loan portfolios.
At December 31, 2021, 2020, and 2019, unaccreted loan discount on purchased loans amounted to $17.2 million,
$8.9 million, and $12.7 million, respectively. We recorded an initial fair value loan discount mark of $19.3 million for
the Select portfolio, which was reduced by the reclassification to ACL of $4.9 million related to PCD loans. The
Select acquired portfolio comprises the majority of the remaining unaccreted loan discount at December 31, 2021.
In addition to the loan discount accretion recorded on acquired loans, we record accretion on the discounts
associated with the retained unguaranteed portions of SBA loans sold in the secondary market. The level of SBA
loan discount accretion will increase relative to the SBA loan portfolio with continued growth in that line of business.
At December 31, 2021, 2020, and 2019, unaccreted loan discount on SBA loans amounted to $6.0 million, $7.3
million, and $7.1 million, respectively.
36
Amortization of net deferred loan fees also impacts interest income. During 2021, we amortized net deferred PPP
fees of $9.5 million as interest income compared to $4.1 million for 2020. At December 31, 2021, we had $2.6
million in remaining deferred PPP origination fees that will be recognized over the lives of the loans, with
accelerated amortization expected to result from the loan forgiveness process. We expect substantially all of these
fees will be recognized in the first quarter of 2022 as a result of the loan forgiveness process.
The following table presented the major components of the net interest income and NIM.
Average Balances and Net Interest Income Analysis
2021
Avg.
Rate
Average
Volume
Year Ended December 31,
2020
Interest
Earned
or Paid
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2019
Avg.
Rate
Interest
Earned
or Paid
$ 5,018,391
2,204,713
162,878
4.36 % $ 219,013
32,076
1.45 %
2,402
1.49 %
4,702,743
967,900
34,108
4.53 %
2.11 %
2.13 %
213,099
20,429
725
4,346,331
719,435
32,200
5.08 %
2.76 %
3.13 %
220,784
19,881
1,007
485,337
0.50 %
2,427
455,349
0.75 %
3,431
350,434
2.41 %
8,435
($ in thousands)
Assets
Loans (1) (2)
Taxable securities
Non-taxable securities
Other interest-earning
assets, primarily
overnight funds
Total interest-earning
assets
7,871,319
3.25 %
255,918
6,160,100
3.86 %
237,684
5,448,400
4.59 %
250,107
Cash and due from
banks
Premises and equipment
Other assets
Total assets
90,275
125,738
408,313
$ 8,495,645
Liabilities and Equity
Interest-bearing checking
accounts
Money market accounts
Savings accounts
$ 1,353,172
1,923,614
607,452
0.07 % $
0.16 %
0.07 %
Time deposits >$100,000
Other time deposits
552,346
236,558
0.46 %
0.34 %
81,154
116,425
408,319
6,765,998
55,422
117,465
405,760
6,027,047
919
3,158
443
2,549
812
1,019,773
1,367,851
467,682
616,171
239,990
0.12 %
0.34 %
0.15 %
1.33 %
0.64 %
1,208
4,632
711
8,215
1,535
891,766
1,111,599
419,450
704,332
260,741
0.15 %
0.63 %
0.29 %
1.93 %
0.73 %
Total interest-bearing
deposits
Short-term borrowings
Long-term borrowings
Total interest-bearing
liabilities
Noninterest-bearing
checking accounts
Total sources of funds
Other liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
$ 8,495,645
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
4,673,142
—
63,201
0.17 %
— %
2.60 %
7,881
—
1,642
3,711,467
71,955
114,490
0.44 %
1.42 %
1.96 %
16,301
1,022
2,239
3,387,888
209,613
123,035
0.74 %
2.54 %
2.86 %
4,736,343
0.13 %
9,523
3,897,912
0.50 %
19,562
3,720,536
0.91 %
33,903
2,728,768
7,465,111
60,759
969,775
0.13 %
0.34 %
1,932,823
5,830,735
60,731
874,532
6,765,998
0.66 %
1,436,329
5,156,865
57,359
812,823
6,027,047
3.13 % $ 246,395
3.54 %
218,122
3.97 %
216,204
3.16 % $ 248,638
3.56 %
219,590
4.00 %
217,845
3.14 %
3.25 %
3.36 %
3.54 %
3.68 %
5.28 %
1,358
6,992
1,201
13,598
1,901
25,050
5,324
3,529
(1)
(2)
(3)
Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees,
including late fees, prepayment fees, and deferred loan fee amortization, in the amounts of $9,690, $4,755, and $1,264 for 2021, 2020, and 2019,
respectively.
Includes accretion of discount on acquired and SBA loans of $8,814, $6,328, and $5,974 in 2021, 2020, and 2019, respectively.
Includes tax-equivalent adjustments of $2,243, $1,468, and $1,641 in 2021, 2020, and 2019, respectively, to reflect the federal and state tax benefit that
we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax
exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.
37
The following table presents additional detail regarding the estimated impact that changes in loan and deposit
volumes and changes in the interest rates we earned/paid had on our net interest income in 2021 and 2020.
Volume and Rate Variance Analysis
($ in thousands)
Interest income:
Loans
Taxable securities
Non-taxable securities
Other interest-earning assets,
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
Short-term borrowings
Long-term borrowings
Year Ended December 31, 2021
Year Ended December 31, 2020
Change Attributable to
Change Attributable to
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$
14,040
22,055
2,316
188
38,599
(8,126)
(10,408)
(639)
5,914
11,647
1,677
(1,192)
(1,004)
(20,365)
18,234
17,128
6,055
50
1,658
24,891
(24,813)
(7,685)
(5,507)
(332)
548
(282)
(6,662)
(5,004)
(37,314)
(12,423)
311
1,399
158
(571)
(20)
1,277
(1,022)
(1,167)
(600)
(289)
(2,873)
(1,474)
(426)
(268)
173
1,240
106
(323)
(3,600)
(596)
(5,095)
(5,666)
(1,439)
(3,944)
(703)
(723)
(142)
(224)
(9,697)
—
570
(8,420)
(1,022)
(597)
(62)
(2,726)
(213)
(8,687)
(1,577)
(1,076)
(150)
(2,360)
(490)
(5,383)
(366)
(8,749)
(4,303)
(1,289)
Total interest expense
(912)
(9,127)
(10,039)
(3,001)
(11,340)
(14,341)
Net interest income
$
39,511
(11,238)
28,273
27,892
(25,974)
1,918
Note - Changes attributable to both volume and rate are allocated equally between rate and volume variances.
Overall, as demonstrated in the above table, net interest income grew $28.3 million in 2021, with higher earning
asset volumes and lower rates on interest-bearing liabilities, which was partially offset by lower yields on interest-
earning assets, driving the increase.
•
•
•
•
•
For 2021, higher loan volume positively impacted interest income by $14.0 million, partially offset by lower
interest rates on loans which negatively impacted interest income by $8.1 million, resulting in an increase in
loan interest income of $5.9 million.
Higher volumes of total securities balances contributed $24.4 million in additional interest income in 2021.
This was partially offset by the impact of lower interest rates earned on those securities resulting in a
negative impact of $11.0 million on interest income.
Lower interest rates on other interest-earning assets (primarily overnight funds and presold mortgages held
for sale) in 2021 resulted in $1.2 million in lower interest income, which was partially offset by higher
volume.
Lower interest rates paid on deposits drove a $9.7 million decrease in deposit interest expense in 2021.
Reductions in rates on deposits more than offset the higher volumes of interest-bearing demand balances.
Lower levels of borrowings resulted in a decrease in borrowings interest expense of $1.6 million in 2021.
38
Provision for Credit Losses (Loans and Unfunded Commitments)
Prior to our implementation of CECL, the provision for credit losses was based on the then-applicable Incurred Loss
model and represented an estimate of probable incurred losses in the loan portfolio at the end of each reporting
period. Under CECL, the provision for credit losses represents our current estimate of life of loan credit losses in the
loan portfolio and unfunded loan commitments. Our estimate of credit losses under CECL is determined using a
complex model that relies on reasonable and supportable forecasts and historical loss information to determine the
balance of the ACL and resulting provision for loan losses and provision for unfunded commitments which
represents expected losses on unfunded loan commitments that are expected to result in outstanding loan
balances. The allowance for unfunded commitments is included in other liabilities in the consolidated balance
sheets.
The provision for loan losses was $9.6 million in 2021 under the CECL method, compared to $35.0 million in 2020
under the Incurred Loss method. The amount of provision recorded in each period was the amount required such
that the total ACL reflected the appropriate balance as determined under the applicable accounting standards in
effect at each balance sheet date. Under the CECL methodology, during 2021 we reversed $4.5 million in provision
for credit losses due to improving asset quality and better economic forecasts. Offsetting the provision reversal was
the "Day 2" provision expense of $14.1 million which was the calculated ACL recorded for Non-PCD loans acquired
from Select after the initial credit mark adjustment was recorded to the loans. The elevated provision expense in
2020 was primarily a result of the higher estimated incurred losses resulting from macroeconomic effects of the
COVID-19 pandemic and exposures to loans with characteristics or in industries that had greater loss exposure due
to the economic uncertainties brought on by COVID-19.
Total net charge-offs for 2021 were $2.7 million compared to $4.0 million in 2020. In 2020, the higher net charge-offs
were driven by $3.2 million of net charge-offs in our SBA portfolio, and was concentrated in the "commercial,
financial, and agricultural" category.
Also under the CECL method, we recorded $5.4 million in provision for unfunded commitments, which included $3.9
million recorded in the fourth quarter of 2021 upon the acquisition of Select. There was no provision for unfunded
commitments in 2020 under the Incurred Loss method. The provisions for 2021 were recorded primarily due to
increases in construction and land development loan commitments during the year.
Additional discussion on the CECL method and our asset quality and credit metrics, which impact our provision for
credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses and Loan Loss
Experience" sections following.
39
Noninterest Income
Our noninterest income amounted to $73.6 million in 2021, $81.3 million in 2020, and $59.5 million in 2019.
Management evaluates noninterest income on a non-GAAP basis that excludes items such as securities gains and
losses and other miscellaneous gains and losses because we believe excluding those items results in a more
meaningful reflection of noninterest income from recurring sources. We refer to this as "adjusted noninterest
income." A reconciliation of reported noninterest income to adjusted noninterest income is presented in the table
below. Adjusted noninterest income amounted to $73.2 million in 2021, $73.4 million in 2020, and $59.6 million in
2019.
Noninterest Income
($ in thousands)
Service charges on deposit accounts
Other service charges, commissions and fees - interchange income, net of
interchange expense
Other service charges, commissions, and fees - other
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
Securities gains (losses), net
Other gains (losses), net
Noninterest income
Non-GAAP adjustments - Exclude:
Securities (gains) losses, net
Other (gains) losses, net
Adjusted noninterest income
Year Ended December 31,
2021
2020
2019
$
12,317
11,098
12,970
18,480
7,036
10,975
6,947
7,231
7,329
2,885
(1,237)
1,648
73,611
14,142
5,955
14,183
8,848
8,644
7,973
2,533
8,024
(54)
13,814
5,667
3,944
8,495
3,872
8,275
2,564
97
(169)
81,346
59,529
1,237
(8,024)
(1,648)
54
(97)
169
$
73,200
73,376
59,601
Service charges on deposit accounts increased $1.2 million, or 11.0%, in 2021 as compared to 2020. The increase
in 2021 was primarily due to growth in the number of checking accounts generating fees, as well as higher NSF
activity during the year. Also contributing to the increase was the addition of Select deposit accounts and related
income in the fourth quarter of 2021.
Total "Other service charges, commissions and fees" related to net interchange income from bankcard activity
amounted to $18.5 million in 2021, a 30.7% increase from the $14.1 million in 2019. The growth in card usage by
our customers is related to the higher volume of outstanding cards giving rise to increased transaction volume as
well as customer payment preferences. General growth of our bank also contributed to the increase in this line item
in 2021.
"Other service charges, commissions and fees - other" includes items such as SBA guarantee servicing fees, ATM
charges, wire transfer fees, safety deposit box rentals, fees from sales of personalized checks, and check cashing
fees. The increases in this line item in 2021 of $1.1 million, or 18.2%, were primarily due to growth in the number of
accounts and related transaction activity, as well as the Bank's deposit base increases.
Fees from presold mortgages amounted to $11.0 million in 2021, a decline of $3.2 million or 22.6% from 2020. The
decrease was due in part to lower originations, combined with a higher percentage of mortgages retained in the
portfolio during 2021 as compared to the prior year.
Commissions from sales of insurance and financial products amounted to $6.9 million in 2021, down $1.9 million
from 2020. The decrease is due to the sale of the majority of the assets of First Bank Insurance, our property and
casualty insurance subsidiary, in June 2021.
40
The reduction in SBA consulting services in 2021 of $1.4 million, or 16.3%, is directly related to the wind-down of
the PPP loan program. SBA Complete recognized $4.7 million in PPP fees during 2020 as compared to $3.2
million in 2021.
The increase in BOLI income in 2021 was related to the acquisition of Select which had $31.1 million in BOLI as of
the date of acquisition.
During 2021, we sold approximately $106.5 million in securities at a loss of $1.2 million. This is compared to sales
transactions in 2020 of $219.7 million for a gain of $8.0 million. The securities sold were in the normal course of
business and our ALCO determination to adjust our portfolio in light of the market rates and the overall portfolio
composition.
“Other gains (losses), net” amounted to a net gain of $1.6 million for 2021 related to the sale of the Company's
property and casualty insurance subsidiary during the year.
Noninterest Expenses
Total noninterest expenses totaled $184.7 million, $161.3 million, and $157.2 million, for 2021, 2020, and 2019,
respectively.
Noninterest Expenses
($ in thousands)
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Merger and acquisition expenses
Amortization of intangible assets
Credit card rewards and other expenses
Telephone and data lines
Software costs
Data processing expense
Advertising and marketing expense
Non-credit losses
Other operating expenses
Total
Year Ended December 31,
2021
2020
2019
$
86,815
16,434
103,249
11,528
4,492
16,845
3,531
4,609
3,027
5,133
3,619
2,580
1,129
84,941
16,027
100,968
11,278
4,285
—
3,956
3,599
2,893
5,035
2,904
2,297
1,024
79,129
16,844
95,973
11,122
5,023
192
4,858
2,759
3,058
4,326
2,787
3,120
1,074
24,914
$
184,656
23,059
161,298
22,902
157,194
Total personnel expense increased from $101.0 million in 2020 to $103.2 million in 2021, an increase of $1.9 million,
or 2.2%. Within personnel expense, salaries expense increased $1.9 million, or 2.6%, while employee benefits
expense increased $0.4 million, or 2.5%. Within salaries expense, commissions declined $1.0 million, or 12.5%,
related to the lower mortgage banking activity, while bonuses increased $2.1 million due to the improved corporate
performance.
Merger and acquisition expenses amounted to $16.8 million in 2021 related to the acquisition of Select. The
expenses were primarily comprised of severance costs and data processing conversion expenses.
Credit card expenses have increased $1.0 million, or 28.1%, relative to the higher levels of outstanding cards and
activity generating revenue.
Telephone and data, software costs, data processing expenses, and advertising and marketing expenses did not
vary significantly among the periods presented, increasing in 2021 related to higher levels of activity and the
incremental costs from Select commencing in the fourth quarter of the year.
41
Non-credit losses remained relatively unchanged for the periods presented, with losses primarily related to debit
card and credit card fraud losses.
Income Taxes
We recorded income tax expense of $24.7 million in 2021, $21.7 million in 2020, and $24.2 million in 2019. Our
effective tax rates were fairly stable at 20.5% for 2021, 21.0% for 2020, and 20.8% for 2019. We expect our
effective tax rate to be approximately 21.0% in 2022.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Loans
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
North Carolina and South Carolina market areas. We also have a portfolio of SBA loans that have been made on a
nationwide basis. The diversity of the economic bases of our market areas has historically provided a stable lending
environment.
Total loans amounted to $6.1 billion at December 31, 2021, an increase of $1.4 billion, or 28.5%, from December
31, 2020. Net loan growth for the year was as follows:
($ in thousands)
Loans at December 31, 2020
Organic net growth, exclusive of PPP loans
Growth from acquisitions, net
PPP loan activity
Loans at December 31, 2021
Organic loan growth percentage
Total loan growth percentage
$
$
4,731,315
382,794
1,164,882
(197,276)
6,081,715
8.1 %
28.5 %
The following table provides a summary of the loan portfolio composition at each of the past five year ends.
Loan Portfolio Composition
2021
2020
2019
2018
2017
As of December 31,
($ in thousands)
Amount
% of
Total
Loans
% of
Total
Loans
% of
Total
Loans
Amount
% of
Total
Loans
% of
Total
Loans
Amount
Amount
Amount
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
Consumer loans
Loans, gross
Unamortized net deferred
loan costs (fees)
$ 648,997
11 % 782,549
17 % 504,271
11 % 457,037
11 % 381,130
10 %
828,549
13 % 570,672
12 % 530,866
12 % 518,976
12 % 539,020
13 %
1,021,966
17 % 972,378
21 % 1,105,014
25 % 1,054,176
25 % 972,772
24 %
331,932
5 % 306,256
6 % 337,922
8 % 359,162
8 % 379,978
9 %
3,194,737
53 % 2,049,203
43 % 1,917,280
43 % 1,787,022
42 % 1,696,107
57,238
1 %
53,955
1 %
56,172
1 %
71,392
2 %
74,348
42 %
2 %
6,083,419
100 % 4,735,013
100 % 4,451,525
100 % 4,247,765
100 % 4,043,355
100 %
(1,704)
(3,698)
1,941
1,299
(986)
Total loans
$ 6,081,715
4,731,315
4,453,466
4,249,064
4,042,369
42
The majority of our loan portfolio over the years has been real estate mortgage loans, with all loan categories
secured by real estate historically comprising approximately 87% to 89% of our outstanding loan balances. In 2020,
our total loans secured by real estate decreased to 82% of outstanding loan balances due to an increase in PPP
loans, which are unsecured loans and are included in the line item "commercial, financial, and agricultural" as
discussed further below.
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.
Residential real estate loans declined from 25% of total loans at December 31, 2018 to 17% of total loans at
December 31, 2021. 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 Select loan portfolio acquired during 2021 had only a 12.8% mix of residential real estate loans, thus driving
down the overall portfolio percentage in this category.
Commercial real estate loans as a percentage of total loans increased to 53% at December 31, 2021 primarily due
to the Select acquisition as 51% of its loan portfolio was in this category.
Commercial, financial, and agricultural loans returned to the historical level of approximately 11% of total loans at
December 31, 2021, decreasing from 17% at the prior year end. As noted above, the fluctuations were due primarily
to PPP loans, which declined $197.3 million during 2021 due to forgiveness of loans. We began originating PPP in
April 2020 under the provisions of the CARES Act and subsequent federal acts. These loans are fully guaranteed
by the SBA and may be eligible for loan forgiveness under the provisions of the CARES Act. During 2020, we
funded approximately $247.5 million of PPP loans. At December 31, 2020, we had a remaining balance of $240.9
million in PPP loans outstanding, which represented 30.8% of our commercial, financial, and agricultural loans and
5.1% of our total loans. During 2021, we originated an additional $113.4 million of PPP loans, assumed $17.3
million from Select, and processed total PPP loan forgiveness of $339.2 million. As of December 31, 2021, we had
$39.0 million in outstanding PPP loans.
A summary of scheduled loan maturities, based on contractual maturity dates, over certain time periods is
presented below, with fixed rate loans and adjustable rate loans shown separately.
43
Loan Maturities
As of December 31, 2021
($ in thousands)
Amount
Yield
Due within
one year
Due after one year
but
within five years
Yield
Amount
Due after five years
but
within fifteen years
Yield
Amount
Due after fifteen
years
Total
Amount
Yield
Amount
Yield
Variable Rate Loans:
Commercial, financial,
and agricultural
Real estate –
construction, land
development & other
land loans
Real estate – mortgage –
residential (1-4 family)
first mortgages
Real estate – mortgage –
home equity loans / lines
of credit
Real estate – mortgage –
commercial and other
$ 101,174
3.48 %
33,572
3.65 %
50,198
5.68 %
1,133
4.90 %
186,077
4.14 %
180,121
4.54 %
90,530
3.81 %
28,986
4.46 %
12,097
4.91 %
311,734
4.33 %
10,132
4.82 %
13,941
4.79 %
27,382
4.05 %
141,146
3.53 %
192,601
3.74 %
19,574
4.22 %
40,446
4.02 %
261,432
3.37 %
39
4.10 %
321,491
3.50 %
67,471
3.81 %
151,081
3.23 %
48,410
4.34 %
108,445
4.93 %
375,407
3.98 %
Consumer loans
7,479
5.42 %
3,424
4.15 %
88
4.40 %
1,173
5.65 %
12,164
5.08 %
Total at variable rates
385,951
4.14 %
332,994
3.60 %
416,496
3.88 %
264,033
3.95 % 1,399,474
3.95 %
Fixed Rate Loans:
Commercial, financial,
and agricultural
Real estate –
construction, land
development & other
land loans
Real estate – mortgage –
residential (1-4 family)
first mortgages
Real estate – mortgage –
home equity loans / lines
of credit
Real estate – mortgage –
commercial and other
39,400
3.30 %
205,477
3.49 %
109,662
3.00 %
98,488
2.71 %
453,027
3.18 %
131,834
3.69 %
173,941
4.34 %
209,936
3.55 %
206
3.55 %
515,917
3.85 %
36,406
4.79 %
222,381
4.60 %
157,098
3.88 %
410,659
3.72 %
826,544
4.02 %
601
6.11 %
4,125
5.33 %
4,785
5.28 %
237
6.37 %
9,748
5.38 %
223,503
4.46 % 1,220,197
4.23 % 1,350,751
3.57 %
2,243
4.81 % 2,796,694
3.93 %
Consumer loans
15,487
6.74 %
21,263
5.87 %
6,378
5.99 %
2,487 16.90 %
45,615
6.78 %
Total at fixed rates
447,231
4.24 % 1,847,384
4.22 % 1,838,610
3.57 %
514,320
3.89 % 4,647,545
3.89 %
Subtotal
Nonaccrual loans
Total loans
833,182
4.19 % 2,180,378
4.13 % 2,255,106
3.63 %
778,353
3.99 % 6,047,019
3.90 %
34,696
$ 867,878
—
—
2,180,378
2,255,106
—
778,353
34,696
6,081,715
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
Approximately 14% of our accruing loans outstanding at December 31, 2021 mature within one year and 50% of
total loans mature within five years, with both of those measures being consistent with recent years. As of
December 31, 2021, the percentages of variable rate loans and fixed rate loans as compared to total performing
loans were 23% and 77%, respectively. In recent years, the mix of variable rate loans to fixed rate loans has been
shifting to more fixed rate loans which continue to be popular with many borrowers in order to lock in a low interest
rate during the historically low interest rate environment that has been in effect. While fixed rate loans present 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.
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
44
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. Most of our business activity is with
customers located within the markets where we have banking operations. Therefore, our exposure to credit risk is
significantly affected by changes in the economy within our markets. Approximately 88% of our loan portfolio is
secured by real estate and is therefore susceptible to changes in real estate valuations.
Nonperforming Assets
NPAs include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed
properties. 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.
The following table summarizes our NPAs at the dates indicated.
Nonperforming Assets
($ in thousands)
Nonperforming assets
Nonaccrual loans
Restructured loans - accruing
Accruing loans >90 days past due
Total nonperforming loans
Foreclosed properties
Total nonperforming assets
Allowance for credit losses
2021
2020
As of December 31,
2019
2018
2017
34,696
13,866
1,004
49,566
3,071
52,637
35,076
9,497
—
44,573
2,424
46,997
24,866
9,053
—
33,919
3,873
37,792
22,575
13,418
—
35,993
7,440
43,433
20,968
19,834
—
40,802
12,571
53,373
78,789
52,388
21,398
21,039
23,298
$
$
$
Total Loans
$ 6,081,715
4,731,315
4,453,466
4,249,064
4,042,369
Asset Quality Ratios
Nonaccrual loans to total loans
Nonperforming loans to total loans
Nonperforming assets to total loans and
foreclosed properties
Nonperforming assets to total assets
Allowance for credit losses to nonaccrual
loans
0.57 %
0.82 %
0.87 %
0.50 %
0.74 %
0.94 %
0.99 %
0.64 %
0.56 %
0.76 %
0.85 %
0.62 %
0.53 %
0.85 %
1.02 %
0.74 %
0.52 %
1.01 %
1.32 %
0.96 %
227.08 %
149.36 %
86.05 %
93.20 %
111.11 %
As a matter of policy, we generally place all loans that are past due 90 or more days on nonaccrual basis. The
amount in this category at December 31, 2021 is related to two loans acquired from Select, one of which was
renewed and the other of which was placed on nonaccrual in January 2022.
The increase in nonperforming loans in 2020 was driven by our SBA loan portfolio and the impact of the pandemic,
as many of the delinquent SBA loans which did not qualify for the SBA's relief payment plan defaulted for both
pandemic and other reasons and were transferred to nonaccrual status. The $5.6 million increase in NPAs in 2021
was a direct result of the Select acquisition. While the balance of NPAs increased, our asset quality ratios improved
in 2021 overall relative to the increased loan portfolio, and we continue to see improving trends in asset quality. Our
total nonperforming loans to total loans declined 12 basis points to 0.82% at December 31, 2021, while our total
NPA ratio decreased 14 basis points to 0.50% at December 31, 2021. Additional discussion of the credit quality
classification status of our loans is contained in Note 4 to our consolidated financial statements.
45
As of December 31, 2021, SBA loans accounted for approximately $16.8 million of our nonaccrual loans, or 9.8%, of
the total non-PPP SBA portfolio, compared to $18.4 million, or 10.8%, of the non-PPP SBA portfolio at December
31, 2020. We continue to closely monitor the SBA loan portfolio and give it appropriate consideration when
evaluating the adequacy of the ACL as those loans are generally considered inherently more risky than other loans
in out portfolio. Refer to additional discussion of the ACL below.
As shown in Note 4 to the consolidated financial statements, our accruing past due loans (30 or more days) have
declined $6.3 million to total $16.0 million at December 31, 2021, which is generally reflective of the improved
economic conditions experienced during 2021. We had no loans in COVID-19 payment-deferral status as of year
end.
We classify loans as “special mention” when there is a defined weakness or weaknesses that jeopardize the
repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not
corrected. Performing special mention loans, which are still accruing interest, totaled $43.1million and $61.3 million
as of December 31, 2021 and 2020, respectively. In addition, loans that are in the risk category of "classified" which
are still accruing interest totaled $21.3 million at December 31, 2021 and $25.4 million at December 31, 2020.
These loans have a great risk of further deterioration and potential loss to the Bank.
Foreclosed properties includes primarily foreclosed real estate. Total foreclosed real estate amounted to $3.1 million
at December 31, 2021, up from $2.4 million in 2020. The increase is related to two properties added with the Select
acquisition. We continue to see active real estate markets and steady activity for sales of foreclosed properties.
Allowance for Credit Losses and Loan Loss Experience
The total allowance for credit losses amounted to $78.8 million at December 31, 2021 compared to $52.4 million at
December 31, 2020. The increase was driven by (1) the initial $14.6 million ACL recorded at adoption of the CECL
and (2) the initial "Day 2" provision for loan losses on Select acquired non-PCD loans of $14.1 million. In addition,
there was $4.9 million "Day 1" ACL which we reclassified from credit fair value mark to ACL on the Select's acquired
PCD loans.
As previously discuss in "Critical Accounting Policies and Estimates", we adopted CECL effective January 1, 2021.
The ACL reflects our estimate of life of loan expected credit losses that will result from the inability of our borrowers
to make required loan payments. We established the incremental increase in the ACL at adoption date through
equity and subsequently record amounts needed to adjust the ACL for our current estimate of expected credit
losses through a provision for credit losses charged to earnings. We record loans charged off against the ACL in the
period in which such loans, in management's opinion, become uncollectible. Subsequent recoveries, if any, increase
the ACL when they are recognized.
We use systematic methodologies to determine the ACL for loans and the allowance for certain off-balance-sheet
credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present
the net amount expected to be collected on the loan portfolio. The allowance for unfunded commitments represents
expected losses on unfunded loan commitments that are expected to result in outstanding loan balances and is
included in other liabilities in the the consolidated balance sheets.
We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the
collectability of the loan portfolio. Our estimate of the ACL involves a high degree of judgment. Therefore, the
process for determining expected credit losses may result in a range of expected credit losses. The ACL is
calculated using collectively evaluated pools for loans with similar risk characteristics applying the DCF method.
When a loan no longer shares similar risk characteristics with its segment, the loan is evaluated on an individual
basis applying a DCF or asset approach for collateral-dependent loans. Refer to Note 1 of the consolidated
financial statements for a discussion of our CECL methodology used to determine the ACL and allowance for
unfunded commitments.
Our assessment of the ACL involves uncertainty and judgment and is subject to change in future periods. The
amount of any changes could be significant if the assessment of loan quality or collateral values changes
substantially with respect to one or more loan relationships or portfolios or if there is a significant change in the
reasonable and supportable forecast used to model our expected credit losses. The allocation of the ACL is based
on reasonable and supportable forecasts, historical data, subjective judgment, and estimates and therefore, may
not be predictive of the specific amounts or loan categories in which charge-offs may ultimately occur. In addition,
46
bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the
provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.
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 we 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 Loan Portfolio
Composition table in the above "Loans" section as “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. Collateral for the majority of these loans is located within our principal
market area.
The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated.
However, the allowance for loan losses is available to absorb losses in all categories.
Allocation of the Allowance for Credit Losses
As of December 31,
($ in thousands)
Commercial, financial,
and agricultural
Real estate –
construction, land
development
Real estate – residential
(1-4 family) first
mortgages
Real estate – mortgage -
home equity lines of
credit
Real estate – mortgage -
commercial and other
Consumer loans
Total allocated
Unallocated
Total
% of
Loan
Category
% of
Loan
Category
% of
Loan
Category
% of
Loan
Category
% of
Loan
Category
2017
2018
2019
2020
2021
$ 16,249
2.50% 11,316
1.45%
4,553
0.90%
2,889
0.63%
3,111
0.82%
16,519
1.99%
5,355
0.94%
1,976
0.37%
2,243
0.43%
2,816
0.52%
8,686
0.85%
8,048
0.83%
3,832
0.35%
5,197
0.49%
6,147
0.63%
4,337
1.31%
2,375
0.78%
1,127
0.33%
1,665
0.46%
1,827
0.48%
30,342
2,656
78,789
—
$ 78,789
0.95% 23,603
1,478
4.64%
52,175
213
1.30% 52,388
n/a
1.15%
2.74%
8,938
972
21,398
—
1.11% 21,398
n/a
0.47%
1.73%
7,983
952
20,929
110
0.48% 21,039
n/a
0.45%
1.33%
6,475
950
21,326
1,972
0.50% 23,298
n/a
0.38%
1.28%
n/a
0.58%
Note: "% of Loan Category" represents the ACL as a percent of the respective total loan categories presented previously in the Loan
Portfolio Composition table.
n/a - not applicable
For the years indicated, the following table summarized our net loss experience by loan category and key ratios
demonstrating the asset quality trends over the most recent five years.
47
Loan Ratios, Loss and Recovery Experience
($ in thousands)
Loans outstanding at end of year
Average amount of loans outstanding
Allowance for credit losses, at end of year
Net loan (charge-offs) recoveries
As of December 31,
2021
$ 6,081,715
5,018,391
78,789
2020
4,731,315
4,702,743
52,388
2019
4,453,466
4,346,331
21,398
2018
2017
4,249,064
4,042,369
4,161,838
3,420,939
21,039
23,298
Commercial, financial, and agricultural
$
(1,978)
(4,863)
(1,493)
(933)
(311)
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
Consumer loans
703
488
178
(1,762)
(309)
1,501
276
(37)
(347)
(579)
722
48
322
(981)
(522)
Total (charge-offs) recoveries
$
(2,680)
(4,049)
(1,904)
3,939
1,990
(901)
(1,565)
(347)
44
(472)
1,330
(645)
(155)
(520)
(1,206)
Average loans:
Commercial, financial, and agricultural
$
700,557
707,976
482,654
430,449
367,793
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
Consumer loans
Total average loans
Ratios:
Allowance for credit losses as a percent of loans at
end of year
Allowance for credit losses as a multiple of net
charge-offs
Provision for loan losses as a percent of net
charge-offs
Recoveries of loans previously charged-off as a
percent of loans charged-off
Total net charge-offs (recoveries) as a percent of
average loans
Net charge-offs (recoveries) by loan category as a
percent of average loans:
619,928
615,717
503,183
555,354
466,272
951,573
1,028,334
1,074,938
1,015,360
779,307
300,291
2,391,845
54,197
316,593
1,981,763
52,360
346,331
1,872,666
66,559
366,416
333,397
1,723,117
1,412,511
71,142
61,659
$ 5,018,391
4,702,743
4,346,331
4,161,838
3,420,939
1.30%
1.11%
0.48%
0.50%
0.58%
29.40x
12.94x
11.24x
358.62%
865.37%
118.86%
n/m
n/m
19.32x
59.95%
64.75%
52.38%
69.79%
119.08%
84.56%
0.05%
0.09%
0.04%
(0.03%)
0.04%
Commercial, financial, and agricultural
0.28%
0.69%
0.31%
0.22%
0.08%
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
Consumer loans
n/m – not meaningful
(0.11%)
(0.24%)
(0.14%)
(0.71%)
(0.43%)
(0.05%)
(0.03%)
—%
0.09%
0.20%
(0.06%)
0.07%
0.57%
0.01%
0.02%
1.11%
(0.09%)
0.05%
0.78%
0.09%
—%
0.66%
0.19%
0.01%
0.84%
Net loan charge-offs amounted to $2.7 million in 2021, a decline from $4.0 million in 2020 which is indicative of the
improving economic environment. In 2021, we recorded $2.5 million of charge-offs within our SBA loan portfolio,
which were in the "commercial, financial, and agricultural" and "real estate - mortgage - commercial" categories and
which accounted for 93% of our total net charge-offs for the year. The SBA loan portfolio recorded net charge-offs in
2020 of $3.2 million, or nearly 80% of total net charge-offs for that year.
The ACL to total loans ratio increased to 1.30% in 2021 from 1.11% as of the prior year end related to the
implementation of CECL and the initial provision for the Select acquisition as previously discussed.
48
Securities
Our securities portfolio totaled $3.1 billion at December 31, 2021, compared to $1.6 billion at December 31, 2020.
AFS securities were $2.6 billion at December 31, 2021, compared to $1.5 billion at December 31, 2020. HTM
securities were $513.8 million at December 31, 2021, compared to $167.6 million at December 31, 2020.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate
level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a
balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the
investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain
deposits. All of our mortgage-backed securities, which include both securities AFS and HTM securities, are issued
by GSEs or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet
at fair value for the AFS portfolio and at cost for the HTM portfolio.
Securities Portfolio Composition
($ in thousands)
Securities available for sale:
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
Total securities available for sale
Securities held to maturity:
Mortgage-backed securities
State and local governments
Total securities held to maturity
As of December 31,
2021
2020
2019
$
69,179
2,514,805
46,430
2,630,414
70,206
1,337,706
45,220
1,453,132
20,009
767,285
34,651
821,945
20,260
493,565
513,825
29,959
137,592
167,551
41,423
26,509
67,932
Total securities
$ 3,144,239
1,620,683
889,877
Average total securities during year
$ 2,367,591
1,002,008
751,635
The increase in securities in each year presented was directly related to the significant increase in deposits
generating liquidity in excess of levels needed to fund new loan originations. The excess cash balances were
deployed into fixed rate securities so that we could realize higher yields.
The table below presents the composition, tax equivalent yields, and remaining maturities of our securities as of
December 31, 2021. For more information about these securities, including gross unrealized gains and losses by
type of security and securities pledged, see Note 3 to the consolidated financial statements.
49
After five through ten years
69,179
1,374,008
16,012
1,459,199
Securities Portfolio Maturity Schedule
($ in thousands)
Securities available for sale
Remaining maturity:
One year or less
After one through five years
After ten years
Fair Value
Amortized cost
Weighted-average yield
Weighted average maturity
Securities held to maturity
Remaining maturity:
One year or less
After one through five years
After five through ten years
After ten years
Amortized cost
Fair value
Weighted-average yield
Weighted average maturity
Government-
sponsored
enterprise
securities
Mortgage-
backed
securities (1)
Corporate debt
securities
Total
Weighted
Average
Yield (2)
$
—
—
3,339
912,054
1,020
28,453
4,359
940,507
225,404
945
226,349
$
69,179
2,514,805
46,430
2,630,414
2.66 %
1.52 %
1.56 %
1.79 %
71,951
2,545,151
45,380
2,662,482
1.57 %
1.17 %
8.0 years
1.54 %
3.69 %
1.57 %
6.2 years
2.3 years
6.2 years
Mortgage-
backed
securities (1)
State and local
governments
Total
Weighted
Average
Yield (2)
$
—
20,260
—
—
$
20,260
20,845
1,246
—
16,058
476,261
493,565
490,853
1,246
20,260
16,058
476,261
513,825
511,698
3.65 %
2.11 %
2.07 %
2.01 %
2.02 %
2.11 %
2.02 %
2.02 %
2.5 years
10.1 years
9.8 years
(1) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.
(2) Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 23% tax rate.
The majority of our GSE securities carry one maturity date, often with an issuer call feature. At December 31, 2021,
of the $69.2 million in AFS GSE securities, $38.8 million were issued by the FFCS, $28.5 million were issued by the
FHLMC, and the remaining $1.9 million were issued by the FHLB.
Nearly all of our $2.5 billion in AFS mortgage-backed securities at December 31, 2021 were issued by the FHLMC,
FNMA, GNMA, or the SBA, each of which is a government agency or government-sponsored corporation and
guarantees the repayment of the securities. Included in this total are commercial mortgage-backed securities of
$937.6 million. Mortgage-backed securities vary in their repayment in correlation with the underlying pools of
mortgage loans.
At December 31, 2021, we held $513.8 million in securities classified as HTM, which are carried at amortized cost.
These securities had fair values that were lower than their carrying values by $2.1 million at December 31, 2021.
Approximately $20.2 million of the securities held to maturity are mortgage-backed securities that have been issued
by either the FHLMC or FNMA. The remaining $493.6 million in securities HTM are comprised almost entirely of
highly-rated municipal bonds issued by state and local governments throughout the nation. We have no significant
concentration of bond holdings from one state or local government entity, with the single largest exposure to any
one entity being $9.5 million. We have 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.
50
Deposits
Deposits represent the primary funding source for our loans and investments. Total deposits amounted to $9.1
billion at December 31, 2021, an increase of $2.9 billion, or 45.4%, from December 31, 2020. Deposit growth for
the year was as follows:
($ in thousands)
Deposits at December 31, 2020
Organic net growth
Growth from acquisitions, net
Deposits at December 31, 2021
Organic deposit growth percentage
Total deposit growth percentage
$
$
6,273,596
1,346,060
1,504,973
9,124,629
21.5 %
45.4 %
Our high core deposit growth in 2021, which has continued from 2020, is believed to be due to a combination of
stimulus funds and deposits arising from PPP loans, changes in customer behaviors during the pandemic, a flight to
quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives. 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.
The following table presents summary of the deposit balances and mix at each of the past five year ends.
Deposit Composition
2021
2020
2019
2018
2017
As of December 31,
($ in thousands)
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Noninterest-bearing
checking accounts
Interest-bearing
checking accounts
Money market
accounts
$ 3,348,622
37 % 2,210,012
35 % 1,515,977
31 % 1,320,697
28 % 1,196,651
27 %
1,593,231
17 % 1,172,022
19 % 912,784
18 %
916,374
20 % 884,254
20 %
2,562,283
28 % 1,581,364
25 % 1,173,107
24 % 1,035,523
22 % 984,945
23 %
Savings accounts
708,054
8 %
519,266
8 % 424,415
9 %
432,390
9 % 454,860
10 %
Time deposits
>$100,000
605,999
7 %
544,143
9 % 563,806
11 %
451,047
10 % 353,464
Other time deposits
299,025
3 %
226,567
4 % 255,125
5 %
264,000
6 % 293,612
8 %
7 %
Total customer deposits
9,117,214
100 % 6,253,374
100 % 4,845,214
98 % 4,420,031
95 % 4,167,786
95 %
Brokered Deposits
7,415
— %
20,222
— %
86,141
2 %
239,875
5 % 239,659
5 %
Total deposits
$ 9,124,629
100 % 6,273,596
100 % 4,931,355
100 % 4,659,906
100 % 4,407,445
100 %
Our deposit mix continues a trend of being more heavily concentrated in transaction and non-time deposit accounts,
with time deposits declining from 21% of total deposits at December 31, 2018, to 10% at December 31, 2021. This
is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits and
allows us to reprice these deposit categories at any time. We believe that the shift in mix from time deposits has
been due in part to the relatively small gap between the interest rates that we pay on transaction accounts versus
the rates we pay on time deposits. As demonstrated in the table below, the majority of our time deposits greater
than $100,000 mature within one year, with 50% maturing within the next six months.
As a result of the strong retail deposit growth in 2020, we were able to reduce our level of brokered deposits during
the year by $65.9 million, a decrease of 76.5%. Broker deposits were reduced a further $12.8 million in 2021.
51
As of December 31, 2021, we held approximately $3.4 billion in uninsured deposits, including $224.6 million of
uninsured time deposits.
The table below presents maturities of time deposits of $100,000 or more, and maturities of uninsured time deposits
of more than $250,000 as of December 31, 2021.
Maturities of Time Deposits
($ in thousands)
As of December 31, 2021
3 Months
or Less
Over 3 to 6
Months
Over 6 to
12
Months
Over 12
Months
Total
Time deposits of $100,000 or more
$ 166,902
137,720
193,292
115,500
613,414
Uninsured time deposits of more than $250,000 included
above
$
68,261
62,279
59,390
34,643
224,573
At each of the past three year ends, we had 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. Total borrowings at December 31, 2021 increased $5.6 million since the prior year
end. Select had $12.4 million of borrowings as of the acquisition date. During 2021, FHLB advances decreased
$5.7 million through scheduled payments and the early repayment of one advance. Our borrowings outstanding are
as follows:
($ in thousands)
FHLB advances - long-term
Trust preferred capital issuances
Unamortized discounts on acquired borrowings
$
December 31, 2021
$
1,974
69,076
71,050
(3,664)
67,386
December 31, 2020
7,705
56,704
64,409
(2,580)
61,829
As noted in the table above, at December 31, 2021, we had $69.1 million of borrowings structured as trust preferred
capital securities which qualify as capital for regulatory capital adequacy requirements. The Company issued $46.4
million of these securities, $10.3 million was assumed from our acquisition of Carolina Bank, and $12.4 million was
assumed from our acquisition of Select.
At December 31, 2021, the Company had three sources of readily available borrowing capacity:
•
•
•
A line of credit with the FHLB of approximately $866 million which can 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.
A $100 million federal funds line of credit with a correspondent bank which provides for overnight unsecured
federal funds purchased.
A line of credit with the Federal Reserve of approximately $138 million which is secured by a blanket lien on
a portion of our commercial and consumer loan portfolio (excluding real estate loans).
Refer to Note 9 to the consolidated financial statements for additional discussion of our borrowings.
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
52
portfolio is comprised almost entirely of readily marketable securities which could also be sold to provide cash. In
addition, we have available lines of credit from the FHLB and Federal Reserve.
Our overall liquidity started increasing in 2020 and continued into 2021 due to significant and continued deposit
growth that outpaced our loan growth. Our liquid assets (cash and AFS securities) as a percentage of our total
deposits and borrowings amounted to 33.6% at December 31, 2021.
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.
Presented below is a summary of our contractual obligations and other commercial commitments outstanding as of
December 31, 2021.
Contractual Obligations and Other Commercial Commitments
Payments Due Per Period ($ in thousands)
1-3 Years
4-5 Years
After 5 Years
Total
Contractual Obligations
As of December 31, 2021
Borrowings
Operating leases
Time deposits
Non-qualified postretirement plan liabilities
Committed investment obligations
Estimated interest expense on borrowings and
time deposits (1)
Less
than 1 Year
$
134
2,383
1,037
4,624
735,619
125,695
269
13,700
695
13,700
3,802
4,698
Total contractual cash obligations
$
755,907
150,449
98
3,392
41,113
742
—
3,479
48,824
69,781
22,499
10,012
8,413
—
71,050
32,898
912,439
10,119
27,400
12,012
23,991
122,717
1,077,897
(1) Represents forecasted interest expense on borrowings and time deposits based on interest rates and balances at
December 31, 2021. Forecasts are based on the contractual maturity of each liability.
Other Commercial
Commitments
As of December 31, 2021
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Amount of Commitment Expiration Per Period ($ in thousands)
Less
than 1 Year
$
30,852
472,548
20,062
1-3 Years
4-5 Years
After 5 Years
Total
Amounts
Committed
61,704
479,674
1,057
61,704
90,944
171
—
154,260
873,349
1,916,515
—
21,290
Total commercial commitments
$
523,462
542,435
152,819
873,349
2,092,065
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.
As presented in the table above, at December 31, 2021, we had $21.3 million in standby letters of credit
outstanding. We had no carrying amount for these standby letters of credit. The nature of 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 several years, we have had to honor only a few standby letters of
53
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.
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2021 amounted to $1.2 billion compared to $893.4 million at December 31,
2020. 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,
and any stock repurchases reduce shareholders’ equity.
In 2021, the most significant factors that impacted our shareholders' equity were (1) the issuance of stock totaling
$324.4 million in the Select acquisition which increased equity; (2) $95.6 million net income reported for 2021, which
increased equity, (3) common stock dividends declared of $24.2 million, which reduced equity, and (4) other
comprehensive loss of $39.3 million driven by unrealized losses on AFS securities which decreased equity. See the
consolidated statements of shareholders’ equity within the consolidated financial statements for disclosure of other
less significant items affecting shareholders’ equity.
As discussed in “Borrowings” above, we also currently have $69.1 million in trust preferred securities outstanding,
all of which qualify as Tier I capital under 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 our financial
statements.
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, 2021, approximately $894.4 million of the Company’s investment in
the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
Our regulatory capital ratios as of December 31, 2021, 2020, and 2019 are presented in the table below. All of our
capital ratios significantly exceeded the minimum regulatory thresholds for all periods presented.
54
Risk-Based and Leverage Capital Ratios
($ 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 credit losses and unfunded commitments
Other Tier II Capital
Tier II capital additions
Total capital
2021
As of December 31,
2020
2019
$ 1,230,575
(366,609)
24,970
888,936
893,421
(239,702)
(14,350)
639,369
852,401
(236,636)
(5,123)
610,642
63,336
—
952,272
88,692
—
88,692
$ 1,040,964
52,496
—
691,865
52,388
582
52,970
744,835
52,345
—
662,987
21,398
546
21,944
684,931
Total risk weighted assets
$ 7,094,787
4,846,322
4,599,799
Adjusted fourth quarter average assets
$ 10,144,760
7,001,834
5,924,020
Risk-based capital ratios:
Common equity Tier I capital to Tier I risk adjusted assets
Minimum under Basel III
Tier I capital to Tier I risk adjusted assets
Minimum under Basel III
Total risk-based capital to Tier II risk-adjusted assets
Minimum under Basel III
Leverage capital ratios:
Tier I leverage capital to adjusted fourth quarter average assets
Minimum under Basel III
12.53 %
7.00 %
13.42 %
8.50 %
14.67 %
10.50 %
13.19 %
7.00 %
14.28 %
8.50 %
15.37 %
10.50 %
13.28 %
7.00 %
14.41 %
8.50 %
14.89 %
10.50 %
9.39 %
4.00 %
9.88 %
4.00 %
11.19 %
4.00 %
Our goal is to maintain our capital ratios at levels at least 200 basis points higher than the regulatory “well
capitalized” thresholds set for banks. At December 31, 2021, our leverage ratio was 9.39% compared to the
regulatory well capitalized bank-level threshold of 4.00% and our total risk-based capital ratio was 14.67%
compared to the 10.50% regulatory well capitalized threshold. The reduction in our capital ratios in 2021 from the
prior year end is directly related to the Select acquisition and the high balance sheet growth rate experienced in
2021.
In addition to regulatory capital ratios, we also closely monitor our ratio of TCE to tangible assets. This ratio was
8.38% at December 31, 2021 compared to 9.08% at December 31, 2020, with the decline of 70 basis points related
to the significant asset growth that was a result of high deposit growth and the Select acquisition.
See “Supervision and Regulation” under “Business” in Item 1. and Note 15 to the consolidated financial statements
for discussion of other matters that may affect our capital resources.
55
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, 2021 and have no current plans to do so.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk – Item 7A.)
Net interest income is our most significant component of earnings and we consider interest rate risk to be our most
significant market risk. In addition to 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
(which measure the difference between the amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or repricing within that time period), 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 (NIM), even during periods of
changing interest rates. Over the past five years, our NIM has ranged from a low of 3.16% (realized in 2021) to a
high of 4.09% (realized in 2018). The 93 basis point reduction in NIM between the high and low point during this
period was a direct result of the Federal Reserve monetary policy enacted at the beginning of the COVID-19
pandemic resulting in a reduction in short-term market interest rates totaling 150 basis points in March 2020.
The following table sets forth our interest rate sensitivity analysis based on a gap analysis as of December 31,
2021, 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).
56
Interest Rate Sensitivity Analysis
($ in thousands)
Earning assets:
Loans (1)
Securities available for sale (2)
Securities held to maturity (2)
Other earning assets, primarily short-term
investments, loans held for sale, and
investments in FRB and FHLB stock
Total earning assets
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2021
3 Months
or Less
Over 3 to 12
Months
Total Within
12 Months
Over 12
Months
Total
$ 1,324,740
369,777
1,694,517
4,387,198
6,081,715
115,894
319,122
435,016
2,195,398
2,630,414
3,571
8,720
12,291
501,534
513,825
413,194
—
413,194
22,346
435,540
$ 1,857,399
697,619
2,555,018
7,106,476
9,661,494
Percent of total earning assets
Cumulative percent of total earning assets
19.2%
19.2%
7.2%
26.4%
26.4%
26.4%
73.6%
100.0%
100.0%
100.0%
Interest-bearing liabilities:
Interest-bearing checking accounts
Money market accounts
Savings accounts
Time deposits of $100,000 or more
Other time deposits
Borrowings
$ 1,593,231
2,562,283
708,054
166,902
66,413
65,412
—
—
—
137,720
64,797
—
1,593,231
2,562,283
708,054
304,622
131,210
65,412
—
—
—
308,792
167,815
1,974
1,593,231
2,562,283
708,054
613,414
299,025
67,386
Total interest-bearing liabilities
$ 5,162,295
202,517
5,364,812
478,581
5,843,393
Percent of total interest-bearing liabilities
Cumulative percent of total interest-bearing
liabilities
88.3%
3.5%
91.8%
8.2%
100.0%
88.3%
91.8%
91.8%
100.0%
100.0%
Interest sensitivity gap
$ (3,304,896)
495,102
(2,809,794)
6,627,895
3,818,101
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
$ (3,304,896)
(2,809,794)
(2,809,794)
3,818,101
3,818,101
(34.2%)
(29.1%)
(29.1%)
39.5%
39.5%
36.0%
47.6%
47.6%
165.3%
165.3%
As illustrated above, at December 31, 2021, we had $2.8 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 rate 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,
2021 were deposits totaling $4.9 billion comprised of checking, savings, and certain types of money market deposits
with interest rates set by management. These types of deposits historically have not repriced with, or in the same
proportion, as general market indicators.
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 12 months), this
generally results in the Bank 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, which is what we experienced following
57
the March 2020 interest rate cuts. The acquisition of Select did not change our interest-rate sensitivity position or
outlook as Select's and our balance sheets were similarly structured.
Because of the static nature and limitations as discussed above of the gap report, we also employ an earnings
simulation model to analyze the sensitivity of net interest income to movements in interest rates. The model is
based on actual cash flows and repricing characteristics for on- and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets
and liabilities. Earnings-simulation analysis captures not only the potential of these interest sensitive assets and
liabilities to mature or reprice, but also the probability that they will do so. Moreover, earnings-simulation analysis
considers the relative sensitivities of these balance sheet items and projects their behavior over an extended period
of time. The following table presents the Company-estimated net interest income sensitivity as of December 31,
2021. These results assume a static balance sheet and an immediate, sustained 100 or 200 basis point upward and
downward shock to the yield curve. While it is unlikely market rates would immediately move 100 or 200 basis
points upward or downward on a sustained basis, this is another tool used by management and the Board of
Directors to gauge interest rate risk.
Change in Interest Rates (basis points)
+ 200
+100
- 100
- 200
Percent change in
Net Interest Income
5.1%
2.5%
(2.3)%
(5.4)%
The general discussion above 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. Due to actions taken by the Federal Reserve related to short-
term interest rates and the impact of the global economy on longer-term interest rates, we are currently in a very low
and flat interest rate curve environment. 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.
As indicated in the table above, assuming some increase in interest rates in the next 12 months, we may see some
benefit to our NIM from raising rates if we are able to maintain stable funding costs. Our experience historically has
been that our demand deposit accounts have lagged the timing and amount of general market increases. However,
we expect continued pressure on NIM from market competition for quality loans and the investment of liquidity in
lower earning assets until loan demand increases sufficiently to deploy excess liquidity from short-term investments
and securities.
We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency
positions. 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 as discussed
above under Interest Rate Risk. 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.
58
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
to our consolidated financial statements for a discussion of recent rule proposals and changes.
Selected Consolidated Financial Data
The following tables present certain selected consolidated financial data and quarterly financial data for additional
information and trend analysis.
59
Selected Consolidated Financial Data
($ in thousands, except per share data)
Income Statement Data
Interest income
Interest expense
Net interest income
Provision (reversal) for loan losses
Provision for unfunded commitments
Net interest income after provision
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
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
Selected Balance Sheet Data (at year end)
Total assets
Loans
Allowance for credit losses
Intangible assets
Deposits
Borrowings
Total shareholders’ equity
Selected Average Balances
Total assets
Loans
Earning assets
Deposits
Interest-bearing liabilities
Total shareholders’ equity
Ratios
Return on average assets
Return on average common equity
Net interest margin (taxable-equivalent basis)
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
Year Ended December 31,
2021
2020
2019
2018
2017
$
$
255,918
9,523
246,395
9,611
5,420
231,364
73,611
184,656
120,319
24,675
95,644
3.19
3.19
0.80
50.92
32.47
45.72
34.54
$ 10,508,901
6,081,715
78,789
382,090
9,124,629
67,386
1,230,575
$ 8,495,645
5,018,391
7,871,319
7,401,910
4,736,343
969,775
237,684
19,562
218,122
35,039
—
183,083
81,346
161,298
103,131
21,654
81,477
2.81
2.81
0.72
40.00
17.32
33.83
31.26
7,289,751
4,731,315
52,388
254,638
6,273,596
61,829
893,421
6,765,998
4,702,743
6,160,100
5,644,290
3,897,912
874,532
250,107
33,903
216,204
2,263
—
213,941
59,529
157,194
116,276
24,230
92,046
3.10
3.10
0.54
41.34
31.22
39.91
28.80
6,143,639
4,453,466
21,398
251,585
4,931,355
300,671
852,401
6,027,047
4,346,331
5,448,400
4,824,216
3,720,536
812,823
231,207
23,777
207,430
(3,589)
—
211,019
58,942
156,483
113,478
24,189
89,289
3.02
3.01
0.40
43.14
30.50
32.66
25.71
5,864,116
4,249,064
21,039
255,480
4,659,339
406,609
764,230
5,693,760
4,161,838
5,112,436
4,516,811
3,663,077
727,920
177,382
12,671
164,711
723
—
163,988
49,232
145,481
67,739
21,767
45,972
1.82
1.82
0.32
41.76
26.47
35.31
23.38
5,547,037
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
1.13%
9.86%
3.16%
66.65%
1.30%
0.50%
0.05%
1.20%
9.32%
3.56%
75.42%
1.11%
0.64%
0.09%
1.53%
11.32%
4.00%
90.31%
0.48%
0.62%
0.04%
1.57%
12.27%
4.09%
91.19%
0.50%
0.74%
(0.03%)
1.00%
8.62%
4.08%
91.73%
0.58%
0.96%
0.04%
Note - During 2021, the Company completed a significant whole-bank acquisition. See additional discussion under "Mergers
and Acquisitions" in Item 1.
60
Quarterly Financial Summary (Unaudited)
($ in thousands except
per share data)
Income Statement Data
2021
2020
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
Interest income, taxable equivalent
$
76,923
Interest expense
Net interest income, taxable equivalent
Taxable equivalent, adjustment
Net interest income
Provision (reversal) for loan losses
Provision for unfunded commitments
Net interest income after provision
Noninterest income (1)
Noninterest expense (2)
Income before income taxes
Income tax expense
Net income
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
Selected Average Balances
Total assets
Loans
Earning assets
Deposits
Interest-bearing liabilities
Total shareholders’ equity
Ratios (annualized where applicable)
Return on average assets
Return on average common equity
Equity to 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
2,371
74,552
707
73,845
11,011
2,432
60,402
15,057
62,789
12,670
2,148
10,522
0.30
0.30
0.20
50.92
41.84
45.72
34.54
61,130
2,001
59,129
576
58,553
(1,400)
1,049
58,904
16,511
40,817
34,598
6,955
27,643
0.97
0.97
0.20
44.17
37.60
43.01
32.59
61,656
2,380
59,276
517
58,759
—
1,939
56,820
21,374
40,985
37,209
7,924
29,285
1.03
1.03
0.20
45.87
39.32
40.91
31.75
58,452
59,780
59,035
57,970
62,367
2,771
3,317
3,955
5,016
7,274
55,681
56,463
55,080
52,954
55,093
443
457
347
330
334
55,238
56,006
54,733
52,624
54,759
—
4,031
6,120
19,298
5,590
—
55,238
—
51,975
—
48,613
—
33,326
—
49,169
20,669
19,996
21,452
26,193
13,705
40,065
41,882
40,439
38,901
40,076
35,842
30,089
29,626
20,618
22,798
7,648
6,441
6,329
4,266
4,618
28,194
23,648
23,297
16,352
18,180
0.99
0.99
0.20
48.83
32.47
43.50
30.78
0.83
0.83
0.18
34.78
20.44
33.83
31.26
0.81
0.81
0.18
25.20
19.60
20.93
30.70
0.56
0.56
0.18
29.65
19.26
25.08
29.95
0.62
0.62
0.18
40.00
17.32
23.08
29.69
$ 10,191,402
8,319,327
7,965,781
7,477,826
7,240,685
6,904,112
6,727,762
6,183,098
5,879,373
4,820,007
4,679,119
4,684,143
4,771,446
4,785,848
4,738,702
4,512,893
9,438,263
7,735,613
7,386,607
6,898,406
6,640,732
6,294,556
6,102,012
5,595,734
8,878,141
7,280,275
6,951,524
6,474,115
6,232,692
5,882,792
5,502,356
4,950,199
5,641,358
4,612,282
4,443,875
4,233,740
4,085,619
3,878,783
3,885,903
3,739,467
1,177,374
918,986
893,978
885,190
889,481
878,325
871,495
858,592
0.41 %
3.55 %
11.71 %
66.22 %
1.32 %
11.93 %
10.95 %
66.21 %
1.47 %
13.14 %
11.03 %
67.31 %
1.53 %
1.30 %
1.34 %
12.92 %
10.58 %
10.55 %
0.98 %
7.55 %
1.18 %
8.52 %
11.33 %
12.26 %
12.47 %
12.60 %
13.52 %
72.35 %
76.56 %
81.35 %
86.12 %
91.17 %
167.30 %
167.72 %
166.22 %
162.94 %
162.54 %
162.28 %
157.03 %
149.64 %
3.13 %
1.30 %
3.03 %
1.31 %
3.22 %
1.41 %
3.27 %
1.42 %
3.38 %
1.11 %
3.48 %
1.02 %
3.49 %
0.89 %
3.96 %
0.54 %
loans
0.82 %
0.80 %
0.86 %
1.04 %
0.94 %
0.86 %
0.94 %
0.76 %
Nonperforming assets as a percent of
total assets
Net charge-offs (recoveries) as a percent
0.50 %
0.48 %
0.51 %
0.65 %
0.64 %
0.63 %
0.69 %
0.60 %
of average total loans
0.05 %
0.00 %
0.07 %
0.10 %
0.07 %
(0.06) %
0.12 %
0.22 %
(1) - Noninterest income includes the following items:
•
•
•
In the fourth quarter of 2021, the Company recorded ($1.2) million in losses on the sale of available for sale securities.
In the second quarter of 2021, the Company recorded a $1.7million gain on the sales of assets of First Bank Insurance.
In the second quarter of 2020, the Company recorded $8.0 million in gains on the sale of available for sale securities.
(2) - Noninterest expense for the fourth quarter of 2021 includes $16.8 million of merger expense.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the caption “Interest Rate Risk".
61
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2021 and 2020
($ 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 $511,699 in 2021 and $170,734 in 2020)
Presold mortgages in process of settlement
SBA and other loans held for sale
Loans
Allowance for credit losses on loans
Net loans
Premises and equipment
Operating right-of-use lease assets
Accrued interest receivable
Goodwill
Other intangible assets
Foreclosed properties
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
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies (see Note 12)
Shareholders’ Equity
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued & outstanding: none in 2021 and 2020
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 35,629,177 shares in 2021 and 28,579,335 shares in 2020
Retained earnings
Stock in rabbi trust assumed in acquisition
Rabbi trust obligation
Accumulated other comprehensive (loss) income
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
62
2021
2020
$
128,228
332,934
461,162
93,724
273,566
367,290
2,630,414
1,453,132
513,825
167,551
19,257
61,003
42,271
6,077
6,081,715
4,731,315
(78,789)
(52,388)
6,002,926
4,678,927
136,092
20,719
25,896
364,263
17,827
3,071
165,786
86,660
120,502
17,514
20,272
239,272
15,366
2,424
106,974
52,179
$ 10,508,901
7,289,751
$
3,348,622
1,593,231
2,562,283
708,054
613,414
299,025
2,210,012
1,172,022
1,581,364
519,266
564,365
226,567
9,124,629
6,273,596
67,386
607
21,192
64,512
61,829
904
17,868
42,133
9,278,326
6,396,330
—
—
722,671
532,874
(1,803)
1,803
(24,970)
400,582
478,489
(2,243)
2,243
14,350
1,230,575
893,421
$ 10,508,901
7,289,751
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2021, 2020 and 2019
($ in thousands, except per share data)
Interest Income
Interest and fees on loans
Interest on investment securities:
Taxable interest income
Tax-exempt interest income
Other, principally overnight investments
Total interest income
Interest Expense
Savings, checking and money market accounts
Time deposits of $100,000 or more
Other time deposits
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Provision for unfunded commitments
Total provision for credit losses
Net interest income after provision for credit 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
Securities (losses) gains, net
Other gains (losses), net
Total noninterest income
Noninterest Expense
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Merger and acquisition expenses
Intangibles amortization
Foreclosed property losses, net
Other operating expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
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.
63
2021
2020
2019
$
219,013
213,099
220,784
32,076
2,402
2,427
255,918
4,520
2,549
812
1,642
9,523
246,395
9,611
5,420
15,031
231,364
12,317
25,516
10,975
6,947
7,231
7,329
2,885
(1,237)
1,648
73,611
86,815
16,434
103,249
11,528
4,492
16,845
3,531
24
44,987
184,656
120,319
24,675
20,429
725
3,431
237,684
6,551
8,215
1,535
3,261
19,562
218,122
35,039
—
35,039
183,083
11,098
20,097
14,183
8,848
8,644
7,973
2,533
8,024
(54)
81,346
84,941
16,027
100,968
11,278
4,285
—
3,956
547
40,264
161,298
103,131
21,654
19,881
1,007
8,435
250,107
9,551
13,598
1,901
8,853
33,903
216,204
2,263
—
2,263
213,941
12,970
19,481
3,944
8,495
3,872
8,275
2,564
97
(169)
59,529
79,129
16,844
95,973
11,122
5,023
192
4,858
939
39,087
157,194
116,276
24,230
$
$
$
95,644
81,477
92,046
3.19
3.19
0.80
2.81
2.81
0.72
3.10
3.10
0.54
29,876,151
30,027,785
28,839,866
28,981,567
29,547,851
29,720,499
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021, 2020 and 2019
($ in thousands)
Net income
Other comprehensive (loss) income:
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising during the period, pretax
Tax benefit (expense)
Reclassification to realized losses (gains)
Tax (benefit) expense
Postretirement plans:
Net gain (loss) arising during period
Tax (expense) benefit
Amortization of unrecognized net actuarial loss
Tax benefit
Other comprehensive (loss) income
Comprehensive income
See accompanying notes to consolidated financial statements.
2021
2020
2019
$
95,644
81,477
92,046
(53,752)
12,352
1,237
(284)
872
(201)
592
(136)
(39,320)
$
56,324
18,729
(4,304)
(8,024)
1,844
589
(135)
686
(158)
9,227
90,704
22,230
(5,157)
(97)
22
(686)
158
814
(200)
17,084
109,130
64
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2021, 2020 and 2019
($ in thousands, except per share data)
Shares
Amount
Common Stock
Stock in
rabbi
trust
assumed
in
acquisition
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Rabbi
trust
obligation
Total
Shareholders’
Equity
Balances, January 1, 2019
29,725 $ 434,453
341,738
(3,235)
3,235
(11,961)
764,230
Net income
Cash dividends declared ($0.54 per common
share)
Change in Rabbi Trust Obligation
92,046
(16,020)
648
(648)
Equity issued related to acquisition earn-out
78
3,070
Stock repurchases
Stock option exercises
Stock withheld for payment of taxes
Stock-based compensation
Other comprehensive loss
(282)
(10,000)
9
(20)
91
129
(702)
2,564
92,046
(16,020)
—
3,070
(10,000)
129
(702)
2,564
17,084
17,084
Balances, December 31, 2019
29,601
429,514
417,764
(2,587)
2,587
5,123
852,401
Net income
Cash dividends declared ($0.72 per common
share)
Change in Rabbi Trust Obligation
81,477
(20,752)
344
(344)
Equity issued related to acquisition earn-out
24
494
Stock repurchases
Stock withheld for payment of taxes
Stock-based compensation
Other comprehensive income
(1,117)
(31,868)
(11)
82
(307)
2,749
81,477
(20,752)
—
494
(31,868)
(307)
2,749
9,227
9,227
Balances, December 31, 2020
28,579
400,582
478,489
(2,243)
2,243
14,350
893,421
Adoption of new accounting standard
Net income
Cash dividends declared ($0.80 per common
share)
Change in Rabbi Trust Obligation
(17,051)
95,644
(24,208)
440
(440)
Equity issued pursuant to acquisition
7,070
324,389
Stock repurchases
Stock withheld for payment of taxes
Stock-based compensation
Other comprehensive income
(107)
(4,036)
(18)
105
(786)
2,522
(17,051)
95,644
(24,208)
—
324,389
(4,036)
(786)
2,522
(39,320)
(39,320)
Balances, December 31, 2021
35,629 $ 722,671
532,874
(1,803)
1,803
(24,970)
1,230,575
See accompanying notes to consolidated financial statements.
65
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2021, 2020 and 2019
2021
($ in thousands)
Cash Flows From Operating Activities
Net income
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses
Deferred tax expense (benefit)
Net security premium amortization
Loan discount accretion
Other purchase accounting accretion and amortization, net
Foreclosed property losses and write-downs, net
Losses (gains) on securities available for sale
Other (gains) losses
Bank-owned life insurance income
(Decrease) increase in net deferred loan fees
Depreciation of premises and equipment
Amortization of operating lease right-of-use assets
Repayments of lease obligations
Stock-based compensation expense
Amortization of intangible assets
Amortization of SBA servicing assets
Fees/gains from sales of presold mortgages 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
Increase in accrued interest receivable
Decrease (increase) in other assets
(Decrease) increase in accrued interest payable
(Decrease) increase 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
Redemptions of FRB and FHLB stock
Purchases of bank owned life insurance
Net increase in loans
Proceeds from sales of foreclosed properties
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Net cash received (paid) in acquisition activities
Net cash received in disposition activities
Net cash used by investing activities
Cash Flows From Financing Activities
Net increase in deposits
Net decrease in short-term borrowings
Proceeds from long-term borrowings
Payments on long-term borrowings
Cash dividends paid – common stock
Repurchases of common stock
Proceeds from stock option exercises
Payment of taxes related to stock withheld
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 (loss) gain on securities available for sale, net of taxes
Non-cash: Accrued dividends at period end
Non-cash: Initial recognition of operating lease right-of-use assets and liabilities
Non-cash: Derecognition of intangible assets related to sale of insurance operations
Acquisition of Select Bancorp, Inc.
See accompanying notes to consolidated financial statements.
66
2020
2019
$
95,644
81,477
92,046
15,031
(4,800)
14,058
(8,814)
(47)
24
1,237
(1,648)
(2,885)
(1,994)
6,187
1,937
(1,814)
2,268
3,531
2,272
(18,304)
(326,019)
359,300
(88,304)
79,125
(773)
13,978
(683)
394
138,901
(1,572,355)
(271,169)
358,259
13,642
106,484
2,043
(25,000)
(97,559)
3,995
(9,402)
313
208,992
11,314
(1,270,443)
1,258,193
—
—
(5,729)
(22,228)
(4,036)
—
(786)
1,225,414
93,872
367,290
461,162
10,206
32,506
2,285
(41,400)
7,125
2,191
(10,229)
See Note 2
35,039
(10,007)
5,019
(6,328)
81
547
(8,024)
54
(2,533)
5,639
5,838
2,012
(1,844)
2,540
3,956
1,795
(22,156)
(418,394)
410,898
(147,934)
115,460
(3,624)
(991)
(1,250)
9,805
57,075
(1,060,054)
(133,611)
223,842
33,030
219,697
9,851
—
(233,788)
2,485
(12,363)
189
(9,559)
—
(960,281)
1,342,340
(198,000)
150,000
(202,035)
(20,936)
(31,868)
—
(307)
1,039,194
135,988
231,302
367,290
20,812
29,604
1,583
14,425
5,144
253
—
—
$
2,263
1,588
2,653
(5,974)
(9)
939
(97)
169
(2,564)
(642)
5,836
1,857
(1,669)
2,270
4,858
1,340
(12,219)
(173,705)
162,476
(150,677)
124,527
(644)
(3,171)
178
(391)
51,238
(498,891)
—
158,920
32,461
39,797
4,088
—
(165,203)
5,877
(3,534)
1,799
—
—
(424,686)
272,206
(55,000)
—
(51,119)
(13,662)
(10,000)
129
(702)
141,852
(231,596)
462,898
231,302
33,725
24,336
3,249
17,073
5,328
19,406
—
—
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2021
Note 1. Summary of Significant Accounting Policies
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, SBA Complete, Inc. (“SBA Complete”), Magnolia Financial, Inc. ("Magnolia Financial"),
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 Annual Report 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. SBA Complete specializes in providing consulting services for financial institutions across
the country related to Small Business Administration (“SBA”) loan origination and servicing. Magnolia Financial is a
business financing company that makes loans throughout the southeastern United States. 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 ("GAAP") 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 credit losses on loans, the allowance for credit losses on
unfunded commitments, the accounting and impairment testing related to intangible assets, and the fair value and
discount accretion of acquired loans.
Operating, Accounting and Reporting Considerations related to COVID-19 - The coronavirus ("COVID-19")
pandemic that emerged in March 2020 negatively impacted the local, national, and global economy, disrupted
global supply chains, caused business closures, increased unemployment levels, and created significant volatility
and disruption in financial markets.
In response to the hardships arising from the pandemic, on March 27, 2020, the Coronavirus Aid, Relief, and
Economic Security Act ("CARES Act") was signed by the President of the United States. Certain provisions within
the CARES Act encouraged financial institutions to practice prudent efforts to work with borrowers impacted by
COVID-19. Under these provisions, which the Company applied, loan modifications deemed to be COVID-19-
related are not considered a troubled debt restructuring (“TDR”) if the loan was not more than 30 days past due as
of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the
date of termination of the COVID-19 national emergency or December 31, 2020. This CARES Act provision was
subsequently extended to January 1, 2022. The banking regulators issued similar guidance, which also clarified that
a COVID-19-related modification would not meet the requirements under GAAP to be a TDR if the borrower was
current on payments at the time the underlying loan modification program was implemented and if the modification
is considered to be short-term. During 2020, the Company generally offered impacted borrowers loan payment
deferrals of 90 days in duration, with a deferral renewal if requested. As of December 31, 2020, the Company had
payment deferrals of $16.6 million, and at December 31, 2021 the Company had no loans deferred under this
CARES Act provision.
Additionally, the Company participated in the SBA's Paycheck Protection Program ("PPP") under the CARES Act.
The Company originated $247.5 million in PPP loans during the second quarter of 2020. In December 2020, the
Bipartisan-Bicameral Omnibus COVID Relief Deal, included, among other things, additional stimulus payments for
individuals under certain income thresholds and small business relief, which included additional funds for PPP
loans. As a result, in early 2021, the Company originated an additional $113.1 million in PPP loans. Beginning in
the second quarter of 2020, the Company began accepting and transmitting PPP loan forgiveness documentation.
67
This forgiveness process continued during 2021, and as a result, the Company's remaining PPP loans amounted to
only $39.0 million at December 31, 2021.
The economies of our market areas generally improved during 2021 as they recovered from the pandemic.
However, the ongoing impact on the Company of the continuing pandemic, including infection rate spikes and new
strains of COVID-19 is uncertain. The extent to which the COVID-19 pandemic and its variants have a further
impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity
ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope
and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in
response to the COVID-19 pandemic.
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.
Cash and Cash Equivalents - The Company considers all highly liquid assets with original maturities of 90 days or
less, such as cash on hand, noninterest-bearing and interest-bearing amounts due from banks and federal funds
sold, to be “cash equivalents.”
Securities - Debt securities that the Company has the positive intent and ability to hold to maturity are classified as
“held to maturity” ("HTM") and carried at amortized cost. Debt securities not classified as held to maturity are
classified as “available for sale” ("AFS") and carried at fair value, with unrealized holding gains and losses being
reported as other comprehensive income or loss and reported as a separate component of shareholders’ equity.
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts are generally
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. Gains and losses on sales of securities are recognized at the time of
sale based upon the specific identification method.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days
delinquent. Interest accrued but not received for a security placed on nonaccrual is reversed against interest
income.
Allowance for Credit Losses ("ACL") - Securities Held to Maturity - Since its adoption of Accounting Standards
Codification 326 ("CECL"), the Company measures expected credit losses on HTM debt securities on an individual
security basis. Accrued interest receivable on HTM debt securities totaled $3.7 million at December 31, 2021 and
was excluded from the estimate of credit losses.
The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating
agencies and the average of the annual historical loss rates associated with those ratings. The Company then
multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and
supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a
lifetime expected loss amount.
Virtually all of the mortgage-backed securities held by the Company are issued by government-sponsored
enterprises. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated
by major rating agencies, and have a long history of no credit losses. Substantially all of the state and local
government securities held by the Company are highly rated by major rating agencies. As a result, there was no
ACL on HTM securities at December 31, 2021.
Allowance for Credit Losses - Securities Available for Sale - For AFS debt securities in an unrealized loss
position, the Company first assesses whether it intends to sell, or if it is more likely than not that it will be required to
sell the security before recovery of the amortized cost basis. If either of the criteria regarding intent or requirement
to sell is met, the security's amortized cost basis is written down to fair value through income with the establishment
of an allowance under CECL compared to a direct write down of the security under previously applicable accounting
68
standard ASC 310-30 ("Incurred Loss"). For debt securities AFS that do not meet the aforementioned criteria, the
Company evaluates whether any decline in fair value is due to credit loss factors. In making this assessment,
management considers any changes to the rating of the security by a rating agency and adverse conditions
specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the
present value of cash flows expected to be collected from the security is compared to the amortized cost basis of
the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a
credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair
value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for
credit losses is recognized in other comprehensive income.
Changes in the ACL under CECL are recorded as provision for (or reversal of) credit loss expense. Losses are
charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or
when either of the criteria regarding intent or requirement to sell is met. At December 31, 2021, there was no ACL
related to the AFS portfolio. Accrued interest receivable on available for sale debt securities totaled $5.0 million at
December 31, 2021 and was excluded from the estimate of credit losses.
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. Additionally, the Company records gains for loans in the process of closing,
based on the changes in fair value of the loans and related commitments. 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 fair value.
SBA and Other Loans Held for Sale - SBA loans included in this line item represent the guaranteed portion of SBA
loans that the Company intends to sell in the near future. These loans are carried at the lower of cost or market as
determined on an individual loan basis. There were $9.6 million and $6.1 million in SBA loans held for sale at
December 31, 2021 and 2020, respectively.
At December 31, 2021, this line item also included two pools of loans assumed in the Company's acquisition of
Select Bancorp, Inc. that the Company determined did not align with its strategy or were not in our markets and
were thus designated for sale. These loans amounted to $51.4 million at December 31, 2021 and were carried at
the lower of cost or market at the aggregate level for each pool. See Note 2 for additional discussion of the
valuation of these loan pools and Note 22 for disclosure of their disposition.
Loans - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase
premiums and discounts and deferred fees and costs. Accrued interest receivable related to these loans totaled
$17.2 million at December 31, 2021 and was reported in accrued interest receivable on the consolidated balance
sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized in interest income using methods that approximate a level yield
without anticipating prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well
collateralized and in the process of collection, or when management believes, after considering economic and
business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of
business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a
scheduled payment has not been received 30 days after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest
received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under
the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are
returned to accrual status when all the principal and interest amounts contractually due are brought current, there is
a sustained period of repayment performance, and future payments are reasonably assured.
Purchased Credit Deteriorated ("PCD") Loans - Subsequent to the Company's adoption of CECL on January 1,
2021, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit
69
quality since origination are considered PCD loans. In determining whether an acquired loan is a PCD loan, the
Company considers internal loan grades, delinquency status, and other relevant factors.
At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk
characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual
PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost
basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized
upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the
amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and
premiums are recognized through interest income on a level-yield method over the life of the loans. Subsequent to
initial recognition, PCD loans are subject to the same interest income recognition and impairment model as non-
PCD loans, with changes to the ACL recorded through provision expense. All loans and leases considered to be
purchased credit impaired ("PCI") prior to January 1, 2021 under prior accounting guidance were converted to PCD
on that date.
Allowance for Credit Losses - Loans - The ACL on loans is a valuation account that is deducted from the loans'
amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off
against the allowance when management believes the uncollectibility of a loan balance is confirmed. Estimated
recoveries are considered for post-CECL adoption date charge-offs to the extent that they do not exceed the
aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable totaling
$17.2 million at December 31, 2021 was excluded from the estimate of credit losses.
The ACL is measured on a collective pool basis when similar risk characteristics exist. Loans with similar risk
characteristics are grouped into homogenous segments, or pools, for analysis. The Discounted Cash Flow (“DCF”)
method is utilized for substantially all pools, with discounted cash flows computed for each loan in a pool based on
its individual characteristics (e.g. maturity date, payment amount, interest rate, etc.), and the results are aggregated
at the pool level. A probability of default and loss given default, as adjusted for recoveries (as noted above), are
applied to the discounted cash flows for each pool, while considering prepayment and principal curtailment effects.
The analysis produces a discounted expected cash flow total for each pool, which is then compared to the
amortized cost of the pool to arrive at the expected credit loss.
In determining the proper level of default rates and loss given default, management has determined that the loss
experience of the Company provides the best basis for its assessment of expected credit losses. It therefore
utilizes its own historical credit loss experience by each loan segment over an economic cycle, while excluding loss
experience from certain acquired institutions (i.e., failed banks).
Management considers forward-looking information in estimating expected credit losses. For substantially all
segments of collectively evaluated loans, the Company incorporates two or more macroeconomic drivers using a
statistical regression modeling methodology. The Company subscribes to a third-party service which provides a
quarterly macroeconomic baseline forecast and alternative scenarios for the United States economy. The baseline
forecast, along with the alternative scenarios, are evaluated by management to determine the best estimate within
the range of expected credit losses. The baseline forecast incorporates an equal probability of the United States
economy performing better or worse than this projection. With the ongoing pandemic, along with periodic starts and
stops to reopening the economy and the impact of government stimulus, the baseline and alternative scenarios
have reflected a high degree of volatility in economic forecasts from month-to-month. The Company based its
adoption date allowance for credit loss adjustment primarily on the baseline forecast, which reflected ongoing
threats to the economy, primarily arising from the pandemic. In reviewing forecasts during 2021, management
noted high degrees of volatility in the monthly forecasts. Given the uncertainty that the volatility is indicative of and
the inherent imprecision of a forecast accurately projecting economic statistics during these unprecedented times,
management elected to base each of the 2021 quarter-end computations of the ACL primarily on an alternative,
more negative forecast, that management judged to more appropriately reflect the inherent risks to its loan portfolio.
Management has also evaluated the appropriateness of the reasonable and supportable forecast scenarios utilized
for each period and has made adjustments as needed. For the contractual term that extends beyond the
reasonable and supportable forecast period, the Company reverts to the long-term mean of historical factors over
12 quarters using a straight-line approach. The Company generally utilizes a four-quarter forecast and a 12-quarter
reversion period to the long-term average, which is then held static for the remainder of the forecast period.
70
Included in its systematic methodology to determine its ACL on loans, management considers the need to
qualitatively adjust expected credit losses for information not already captured in the loss estimation process.
These qualitative adjustments either increase or decrease the quantitative model estimation (i.e., formulaic model
results). Each period the Company considers qualitative factors that are relevant within the qualitative framework
that includes the following: 1) changes in lending policies, procedures, and strategies, 2) changes in the nature and
volume of the portfolio, 3) staff experience, 4) changes in volume and trends in classified loans, delinquencies, and
nonaccrual loans, 5) concentration risk, 6) trends in underlying collateral value, 7) external factors, including
competition and legal and regulatory factors, 8) changes in the quality of the Company's loan review system, and 9)
economic conditions not already captured.
The Company has identified the following portfolio segments and calculates the ACL for each using a DCF
methodology at the loan level, with loss rates, prepayment assumptions, and curtailment assumptions driven by
each loan’s collateral type:
Commercial, financial, and agricultural - Risks to this loan category include industry concentration and the inability
to monitor the condition of the collateral which often consists of inventory, accounts receivable, and other non-real
estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic
conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also included in this
category for periods subsequent to March 31, 2020 are PPP loans, which are fully guaranteed by the SBA and thus
have minimal risk.
Real estate - construction, land development, & other land loans - Risks common to commercial construction loans
are cost overruns, changes in market demand for property, inadequate long-term financing arrangements, and
declines in real estate values. Residential construction loans are susceptible to those same risks as well as those
associated with residential mortgage loans (see below). Changes in market demand for property could lead to
longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.
Real estate - mortgage - residential (1-4 family) first - Residential mortgage loans are susceptible to weakening
general economic conditions and increases in unemployment rates and declining real estate values.
Real estate - mortgage - home equity loans / lines of credit - Risks common to home equity loans and lines of credit
are general economic conditions, including an increase in unemployment rates and declining real estate values,
which reduce or eliminate the borrower’s home equity.
Real estate - mortgage - commercial and other - Loans in this category are susceptible to declines in occupancy
rates, business failure, and general economic conditions. Also, declines in real estate values and lack of suitable
alternative use for the properties are risks for loans in this category.
Consumer loans - Risks common to these loans include regulatory risks, unemployment, and changes in local
economic conditions as well as the inability to monitor collateral consisting of personal property.
When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty
at the reporting date and repayment is expected to be provided substantially through the operation or sale of the
collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for
selling costs as appropriate.
When the DCF method is used to determine the ACL, management adjusts the effective interest rate used to
discount expected cash flows to incorporate expected prepayments.
Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments
when appropriate. The contractual term excludes expected extensions, renewals, and modifications unless either of
the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed
with an individual borrower or the extension, or renewal options are included in the original or modified contract at
the reporting date and are not unconditionally cancellable by the Company.
Troubled Debt Restructurings - A loan for which the terms have been modified resulting in a more than
insignificant concession, and for which the borrower is experiencing financial difficulties, is generally considered to
be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for
investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified
within the restructuring.
71
SBA Loans – Through its SBA Lending Division, the Company offers loans guaranteed by the 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. The Company generally sells the guaranteed portion of the SBA loan as soon as it is eligible to be sold and
retains the servicing right. When the guaranteed portion of an SBA loan is sold, the Company allocates the carrying
basis of the loan 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 relative fair value allocation results
in a discount that is recorded on the unguaranteed portion of the loan that is retained. The discount is amortized as
a yield adjustment over the life of the loan, so long as the loan performs. In the event the loan is moved to
nonaccrual status, the Company ceases the amortization of the discount and upon any subsequent transfer to
foreclosed properties or liquidation of the loan, the remaining discount is amortized, along with any remaining
servicing asset and deferred loan costs. Refer also to SBA Servicing Assets below.
Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the
assets has been relinquished. Control over financial assets is deemed to be surrendered when the assets have
been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them before their maturity.
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. Land is carried at cost. Maintenance and repairs are charged to operations in the year incurred. Gains and
losses on dispositions are included in current operations.
Goodwill and Other Intangible Assets - Business combinations are accounted for using the acquisition method of
accounting. Identifiable intangible assets are recognized separately and are amortized over their estimated useful
lives, which for the Company has generally been five 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 rather is subject to fair value impairment
tests on at least an annual basis.
SBA Servicing Assets - When the Company sells the guaranteed portion of an SBA loan, the Company continues
to perform the servicing on the loan and collects a fee related to the sold portion of the loan. A SBA servicing asset
is recorded for the fair value of that fee based on an analysis of discounted cash flows that incorporates estimates
of (1) market servicing costs, (2) market-based prepayment rates, and (3) market profit margins. SBA servicing
assets are included in “Other intangible assets” on the consolidated balance sheets. SBA servicing assets are
amortized against income over the lives of the related loans as a reduction of servicing fee income, generally five
years. SBA servicing assets are tested for impairment on a quarterly basis by comparing their estimated fair values,
aggregated by year of origination, to the related carrying values. Changes in observable market data relating to
market interest rates, loan prepayment speeds, and other factors, could result in impairment or reversal of
impairment of these servicing assets and, as such, impact the Company's financial condition and results of
operations.
Foreclosed Properties - Foreclosed properties 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 or the estimated
fair value of the property less estimated selling costs (also see Note 13). 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 as they are incurred.
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.”
72
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.
Other Investments – The Company accounts for substantially all of its investments in limited partnerships and
limited liability companies (“LLCs”) using the equity method of accounting. The accounting treatment depends upon
the Company’s percentage ownership and degree of management influence.
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 and LLCs 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, 2021 and 2020, the Company’s investments in limited partnerships and LLCs totaled $11.3 million
and $7.8 million, respectively, and are included in "Other assets".
Also see Note 3 for discussion of an investment without a readily determinable fair value.
Federal Home Loan Bank ("FHLB") Stock - The Company is a member of the FHLB system. Members are
required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried
at cost and is recorded in "Other assets". Cash dividends are reported as income.
Federal Reserve Bank ("Federal Reserve") Stock - The Company is a member of its regional Federal Reserve
and is required to own stock based on its level of capital. Federal Reserve stock is carried at cost and is recorded
in "Other assets." Cash dividends are reported as income.
Loan Commitments and Related Financial Instruments - Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are funded.
Allowance for Credit Losses - Unfunded Loan Commitments - Effective with the adoption of CECL, the
Company estimates expected credit losses on commitments to extend credit over the contractual period in which
the Company is exposed to credit risk on the underlying commitments, unless the obligation is unconditionally
cancellable by the Company. The allowance for off-balance sheet credit exposures, which is reflected within "Other
Liabilities," is adjusted for as an increase or decrease to the provision for credit losses for unfunded commitments.
The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit
losses on commitments expected to be funded over its estimated life. The allowance is calculated using the same
aggregate reserve rates calculated for the funded portion of loans at the portfolio level applied to the amount of
commitments expected to fund.
Stock-Based Compensation - Restricted stock awards are the primary form of equity grant utilized by the
Company. Compensation cost is based on the fair value of the award, which is the closing price of the Company's
common stock on the date of the grant.
73
Restricted stock awards issued by the Company typically have vesting periods with service conditions.
Compensation cost is recognized as expense over the vesting period. For awards with graded vesting,
compensation cost is recognized on a straight-line basis over the requisite service period. Because of the
insignificant amount of forfeitures the Company has experienced, forfeitures are recognized as they occur.
Earnings Per Share Amounts - Basic Earnings Per Common Share is calculated by dividing net income, less
income allocated to participating securities, by the weighted average number of common shares outstanding during
the period, excluding unvested shares of restricted stock. For the Company, participating securities are comprised
of 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 periods
presented, the Company’s potentially dilutive common stock issuances related to unvested shares of restricted
stock and contingently issuable shares.
If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common
stock issuance is disregarded.
Fair Value of Financial Instruments - Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument, as more fully described in Note 13. 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 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.
Impairment - Goodwill is evaluated for impairment on at least an annual basis, and more often if a triggering event
is identified, by comparing the estimated fair value of the reporting units to their related carrying value. At
December 31, 2021, the Company had two reporting units – 1) the Bank with $360.0 million in goodwill and 2) SBA
activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill. 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.
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.
Segment Reporting - Accounting standards require management to report selected financial and descriptive
information about reportable operating segments that exceed certain thresholds. 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 substantially all within a single banking segment, and the financial statements presented herein
reflect the combined results of all of its operations with that segment. The Company has no foreign operations or
customers.
74
Recent Accounting Pronouncements -
Accounting Standards Adopted in 2021
In August 2018, the Financial Accounting Standards Board 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 removed disclosures
that were no longer considered cost-beneficial, clarified the specific requirements of disclosures, and added
disclosure requirements identified as relevant. The amendments were effective for the Company on January 1, 2021
and the adoption of this amendment did not have a material effect on its financial statements.
On January 1, 2021, the Company adopted CECL which replaced the prior Incurred Loss methodology for
recognizing credit losses with a methodology that is based on estimating future expected lifetime credit losses. The
measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at
amortized cost, including loan receivables and held to maturity debt securities. It also applies to off-balance sheet
credit exposures, such as unfunded commitments to extend credit. In addition, CECL made changes to the
accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance
rather than as a write-down on available for sale debt securities if management does not intend to sell and does not
believe that it is more likely than not they will be required to sell.
In adopting CECL, the Company utilized the modified retrospective method for all financial assets measured at
amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1,
2021 are presented under CECL while prior period amounts continue to be reported under the Incurred Loss
methodology. The transition adjustment of the adoption of CECL included an increase in the ACL on loans of
$14.6 million, which is presented as a reduction to loans outstanding, and an increase in the allowance on unfunded
loan commitments of $7.5 million, which is recorded within "Other liabilities". The adoption of CECL had an
insignificant impact on the Company's HTM and AFS securities portfolios. The Company recorded a net decrease to
retained earnings of $17.1 million as of January 1, 2021 for the cumulative effect of adopting CECL, which reflects
the transition adjustments noted above, net of the applicable deferred tax assets recorded. Federal banking
regulatory agencies provided optional relief to delay the adverse regulatory capital impact of CECL at adoption. The
Company did not elect the option.
The Company adopted CECL using the prospective transition approach for PCD assets that were previously
classified as PCI under ASC 310-30. In accordance with the standard, management did not reassess whether PCI
assets met the criteria of PCD assets as of the date of adoption. The amortized cost basis of the PCD assets was
adjusted to reflect the addition of $0.1 million to the ACL. The remaining noncredit discount (based on the adjusted
amortized cost basis) will be accreted into interest income at a rate that approximates the effective interest rate as
of January 1, 2021.
With regard to PCD assets, because the Company elected to disaggregate the former PCI pools and no longer
considers these pools to be the unit of account, contractually delinquent PCD loans are now reported as nonaccrual
loans using the same criteria as other loans. Similarly, although management did not reassess whether
modifications to individual acquired financial assets accounted for in pools were TDRs as of the date of adoption,
PCD loans that were restructured and met the definition of TDRs after the adoption of CECL are reported as such.
Accrued interest for all financial instruments is included in a separate line on the face of the Consolidated Balance
Sheets. The Company elected not to measure an ACL for accrued interest receivable and instead elected to
reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the
instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The
Company has concluded that this policy results in the timely reversal of uncollectible interest.
The ACL for the majority of loans was calculated using a DCF methodology applied at a loan level with a one-year
reasonable and supportable forecast period and a three-year straight-line reversion period. The Company elected
to use, as a practical expedient, the fair value of collateral when determining the ACL on loans for which repayment
is expected to be provided substantially through the operation or sale of the collateral when the borrower is
experiencing financial difficulty (collateral-dependent loans).
The Company's CECL allowances will fluctuate over time due to macroeconomic conditions and forecasts as well
as the size and composition of the loan portfolios.
75
In March 2020, Accounting Standards Update ("ASU") 2020-04, “Reference Rate Reform (Topic 848): Facilitation of
the Effects of Reference Rate Reform on Financial Reporting” was issued. ASU 2020-04 provides optional
expedients and exceptions for accounting related to contracts, hedging relationships, and other transactions
affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts, hedging
relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued
because of reference rate reform and do not apply to contract modifications made and hedging relationships
entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31,
2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging
relationship. ASU 2020-04 was effective upon issuance and generally can be applied through December 31, 2022.
The adoption of ASU 2020-04 did not significantly impact the Company’s consolidated financial statements.
Accounting Standards Pending Adoption
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 and Dispositions
Select Acquisition
On October 15, 2021, the Company completed the acquisition of Select Bancorp, Inc. (“Select”), headquartered in
Dunn, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization dated June 1, 2021.
Select's subsidiary, Select Bank & Trust, was merged into the Bank. The results of Select are included in the
Company’s results beginning on the October 15, 2021 acquisition date. The Company exchanged 0.408 shares of
its common stock for each share of Select common stock. Additionally, all holders of Select stock options were paid
cash for the difference between the exercise price of each option and the cash out value of $18.00 per option. The
acquisition resulted in the Company issuing 7,070,371 shares of common stock with a fair value $324.4 million and
paying $1.4 million in cash related to the stock options, for total consideration of $325.8 million in exchange for
100% of the outstanding stock of Select.
Select operated 22 branches located in North Carolina, South Carolina, and Virginia. The acquisition
complemented several of the Company’s high-growth markets and increased its market share in others with
facilities, operations, and experienced staff already in place. Accordingly, there were significant synergies to be
gained from the acquisition and the Company recognized the goodwill in the transaction related primarily to the
reasons just noted, as well as the positive earnings of Select.
This transaction was accounted for using the acquisition method of accounting for business combinations, and
accordingly, the assets acquired, intangible assets identified, and liabilities assumed of Select were recorded based
on estimates of fair values as of October 15, 2021. The determination of fair value requires management to make
estimates about discount rates, future expected cash flows, market conditions, and other future events that are
highly subjective in nature and subject to change. Estimated fair values were based on management’s best
estimates, using the information available at the date of acquisition, including the use of third-party valuation
specialists. As of December 31, 2021, management has finalized the valuations of all acquired assets and liabilities
assumed in the Select acquisition.
The following table summarizes the estimated fair value of acquired assets, identified intangible assets, and
liabilities assumed as of October 15, 2021. Following the table is a discussion of valuation approaches utilized in
estimated the fair values in accordance with ASC 850-10. The $132.4 million in goodwill that resulted from this
transaction is non-deductible for tax purposes.
76
($ in thousands)
Assets acquired:
Cash and cash equivalents
Securities available for sale
Loans held for sale
Loans
Premises and equipment
Core deposit intangible
Operating right-of-use lease assets
Other assets
Total
Liabilities assumed:
Deposits
Borrowings
Other liabilities
Total
Net identifiable assets acquired
Less: Total consideration
Fair Value
Estimate
$
210,422
226,228
51,779
1,230,107
21,509
9,170
4,649
61,020
1,814,884
1,593,135
11,038
17,248
1,621,421
193,463
325,819
Goodwill recorded related to acquisition of Select
$
132,356
The following is a description of the methods used to determine the fair values of significant assets acquired and
liabilities assumed included in the table above.
Cash and due from banks, and interest-bearing deposits with banks: The carrying amount of these assets is a
reasonable estimate of fair value based on the short-term nature of these assets.
Securities available for sale: Fair value of securities was measured based on quoted market prices, where available.
If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities
and adjusted for differences between the quoted instrument and the instrument being valued.
Loans held for sale: The valuation of loans held for sale reflected quotes or bids on these loans directly from the
prospective buyers of the pools.
Loans: Fair value of loans acquired was based on a discounted cash flow methodology that considered factors
including loan type and related collateral, classification status, remaining term of the loan, fixed or variable interest
rate, amortization status, and current discount rates. Expected cash flows were derived using inputs consistent with
management's assessment of credit risk for allowance measurement, including estimated future credit losses and
estimated prepayments. A total fair value mark of $19.3 million was recorded. PCD loans were determined based
primarily on internal grades and delinquency status. The Company reclassified from the fair value mark to ACL a
"Day 1" allowance of $4.9 million resulting from PCD loans. The following table presents additional information
related to the acquired loan portfolio at the acquisition date:
($ in thousands)
PCD Loans:
Par value
Allowance for credit losses
Non-credit discount
Purchase price
Non-PCD Loans:
Fair Value
Gross contractual amounts receivable
Estimate of contractual cash flows not expected to be collected
77
October 15, 2021
$
$
$
111,835
(4,895)
(1,251)
105,689
1,124,418
1,134,879
13,257
Premises: Land and buildings held for use are valued at appraised values, which reflect considerations of recent
disposition values for similar property types with adjustments for characteristics of individual properties. Locations
held for sale are valued at appraised values which also reference recent disposition values for similar property types
but also considers marketability discounts for vacant properties. The valuations of locations held for sale are
reduced by estimated costs to sell.
Lease Assets and Lease Liabilities: Lease assets and lease liabilities were measured using a methodology that
involved estimating the future lease payments over the remaining lease term with discounting using a discount rate.
The lease term was determined for individual leases based on management's assessment of the probability of
exercising existing renewal options.
Intangible assets: Core deposit intangible ("CDI") asset represents the value of the relationships with deposit
customers. The fair value for the core deposit intangible asset was estimated based on a discounted cash flow
methodology that gave appropriate consideration to expected customer attrition rates, cost of deposit base, net
maintenance cost attributable to customer deposits and an estimate of the cost associated with alternative funding
sources. The discount rates used for CDI assets are based on market rates. The CDI is being amortized over 10
years utilizing an accelerated method, which results in a weighted-average amortization period of approximately 41
months.
Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on
demand at the acquisition date. Fair values for time deposits were estimated using a discounted cash flow analysis
applying interest rates currently offered to the contractual interest rates on such time deposits.
Borrowings: The fair values of long-term debt instruments are estimated based on quoted market prices for
instrument if available, or for similar instruments if not available.
Supplemental Pro Forma Financial Information
The following table presents certain pro forma information as if Select had been acquired on January 1, 2020.
These results combine the historical results of Select with the Company’s results and, while certain adjustments
were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are
not indicative of what would have occurred had the acquisition taken place on January 1, 2020.
Merger-related costs related to this acquisition of $16.8 million were recorded by the Company during 2021 and
$0.8 million of merger-related costs incurred by Select in 2021 prior to the acquisition were excluded from the pro
forma information below. In addition, no adjustments have been made to such pro forma information to eliminate
the provision for loan losses recorded by Select in the amount of $6.2 million for 2020 and a negative provision for
loan losses recorded by Select of $1.3 million recorded in 2021 prior the acquisition. Pro forma information for the
year 2021 has been adjusted to eliminate the following: 1) the non-PCD provision for loan losses recorded on the
acquisition date of $14.1 million and 2) the initial recording of a provision for credit losses associated with Select’s
unfunded commitments of $3.9 million. If the Select acquisition had occurred at the beginning of 2020, the
acquisition date credit loss reserve amounts would have been included in the fair value measurements of Select
and been included in the goodwill calculation. Expenses related to systems conversions and other costs of
integration are expected to be recorded during 2022. The Company expects to achieve further operating cost
savings and other business synergies as a result of the acquisition.
The following table also discloses the impact of the acquisition of Select from the acquisition date of October 15,
2021 through December 31, 2021. These amounts are included in the Company’s consolidated financial statements
as of and for the year ended December 31, 2021. Merger-related costs have been excluded from these amounts
and the provisions for credit loss amounts associated with non-PCD loans and unfunded commitments that were
discussed above have also been excluded.
78
($ in thousands, unaudited)
Year Ended December 31, 2021
Revenue
Net Income
Actual Select results included in statement of income since acquisition date
$
15,175 $
8,813
Supplemental consolidated pro forma as if Select had been acquired on January 1, 2020
380,241
143,882
Year Ended December 31, 2020
Supplemental consolidated pro forma as if Select had been acquired on January 1, 2020
$
362,654 $
93,980
First Bank Insurance Services, Inc. Disposition
On June 30, 2021, the Company completed the sale of the operations and substantially all of the operating assets
of its property and casualty insurance agency subsidiary, First Bank Insurance Services Inc., to Bankers Insurance,
LLC for an initial purchase price valued at $13.0 million and a future earn-out payment of up to $1.0 million. Cash
received at the time of the sale was $11.3 million. Net assets sold and liabilities transferred amounted to
$1.7 million. The Company recorded a gain of $1.7 million related to the sale. Approximately $10.2 million of
intangible assets were derecognized from the Company's balance sheet as a result of this transaction, including
$7.4 million in goodwill and $2.8 million in other intangibles.
Magnolia Acquisition
On September 1, 2020, the Company completed the acquisition of Magnolia Financial, a business financing
company headquartered in Spartanburg, South Carolina, that makes loans throughout the southeastern United
States. In the transaction, the Company acquired $14.6 million in loans and $0.5 million of other assets, and
assumed $11.7 million in borrowings, substantially all of which was paid off subsequent to the closing. The
transaction value was approximately $10.0 million with the Company paying $9.5 million in cash and issuing 24,096
shares of its common stock, which had a value of approximately $0.5 million.
This acquisition was accounted for using the acquisition method of accounting for business combinations, and
accordingly, the assets and liabilities of Magnolia Financial were recorded based on fair values, which according to
applicable accounting guidance, are subject to change for 12 months following the acquisition. In connection with
this transaction, the Company recorded goodwill of $4.9 million and $1.6 million in other amortizable intangible
assets, all of which are deductible for tax purposes over 15 years.
79
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2021 and 2020 are
summarized as follows:
($ in thousands)
Securities available for
sale:
Government-sponsored
enterprise securities
Mortgage-backed
securities
Corporate bonds
2021
2020
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
$ 71,951
69,179
—
(2,772)
70,016
70,206
371
(181)
2,545,150
2,514,805
45,380
46,430
9,489
1,106
(39,834) 1,318,998
1,337,706
20,832
(2,124)
(56)
43,670
45,220
1,760
(210)
Total available for sale
2,662,481
2,630,414
10,595
(42,662) 1,432,684
1,453,132
22,963
(2,515)
Securities held to maturity:
Mortgage-backed
securities
State and local
governments
20,260
20,845
585
—
29,959
30,900
941
—
Total held to maturity
$ 513,825
511,699
493,565
490,854
2,955
3,540
(5,666) 137,592
139,834
(5,666) 167,551
170,734
2,407
3,348
(165)
(165)
All of the Company’s mortgage-backed securities were issued by government-sponsored enterprises, except for
private mortgage-backed securities with a fair value of $0.9 million and $1.0 million as of December 31, 2021 and
2020, respectively.
The following table presents information regarding securities with unrealized losses at December 31, 2021:
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
($ in thousands)
Fair Value
Government-sponsored
enterprise securities
$
21,436
Mortgage-backed securities
1,773,022
Corporate bonds
999
State and local governments
228,279
Total temporarily impaired
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
522
25,977
1
3,797
47,743
404,484
945
34,398
2,250
69,179
13,857
2,177,506
55
1,869
1,944
262,677
2,772
39,834
56
5,666
securities
$ 2,023,736
30,297
487,570
18,031
2,511,306
48,328
The following table presents information regarding securities with unrealized losses at December 31, 2020:
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
($ in thousands)
Fair Value
Government-sponsored
enterprise securities
$
29,812
Mortgage-backed securities
497,992
Corporate bonds
State and local governments
Total temporarily impaired
3,956
23,310
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
181
1,957
45
165
—
6,168
835
—
—
167
165
—
29,812
504,160
4,791
23,310
181
2,124
210
165
securities
$
555,070
2,348
7,003
332
562,073
2,680
80
As of December 31, 2021 and December 31, 2020, the Company's security portfolio held 371 and 69 securities that
were in an unrealized loss position, respectively. In the above tables, all of the securities that were in an unrealized
loss position at December 31, 2021 and 2020 are bonds that the Company has determined are in a loss position
due primarily to interest rate factors and not credit quality concerns. In arriving at this conclusion, the Company
reviewed third-party credit ratings and considered the amount of the impairment. In the tables above, substantially
all of the mortgage-backed securities in unrealized loss positions at each period end were issued by government-
sponsored agencies, including Freddie Mac, Fannie Mae, and Ginnie Mae, which the Company considered in
concluding that the unrealized loss position of each security was due to interest rate factors and not credit quality
concerns. 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.
No impairment charges were recognized for any securities during the year ended December 31, 2020. At adoption
of CECL on January 1, 2021 and at December 31, 2021, the Company determined that expected credit losses
associated with HTM debt securities were insignificant. See Note 1 for additional details on the adoption of CECL as
it relates to the securities portfolio.
The book values and approximate fair values of investment securities at December 31, 2021, by contractual
maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Debt securities
Due within one year
Due after one year but within five years
Due after five years but within ten years
Due after ten years
Mortgage-backed securities
Total securities
Securities Available for Sale
Securities Held to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
1,001
27,629
87,701
1,000
1,020
28,454
85,191
944
2,545,150
2,514,805
$ 2,662,481
2,630,414
1,246
—
16,058
476,261
20,260
513,825
1,258
—
16,112
473,484
20,845
511,699
At December 31, 2021 and 2020, investment securities with carrying values of $951.4 million and $630.3 million,
respectively, were pledged as collateral for public deposits.
At December 31, 2021 and 2020, there were no holdings of securities of any one issuer, other than the US
Government and its agencies or government sponsored agencies, in an amount greater than 10% of shareholders'
equity.
In 2021, the Company received proceeds from sales of securities of $106.5 million and recorded $1.2 million in
gross losses from the sales. In 2020, the Company received proceeds from sales of securities of $219.7 million and
recorded $8.0 million in gross gains from the sales. In 2019, the Company received proceeds from sales of
securities of $39.8 million and recorded $0.1 million in gross gains from the sales.
Included in “Other Assets” in the Consolidated Balance Sheets are investments in FHLB and Federal Reserve stock
totaling $22.3 million and $23.5 million at December 31, 2021 and 2020, respectively. These investments do not
have readily determinable fair values. The FHLB stock had a cost and fair value of $4.6 million and $5.9 million at
December 31, 2021 and 2020, 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 Federal Reserve stock had a cost
and fair value of $17.8 million and $17.7 million at December 31, 2021 and 2020, respectively, and is a requirement
for Federal Reserve member bank qualification. Periodically, both the FHLB and Federal Reserve recalculate the
Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at
cost. The Company determined that neither stock was impaired at either period end.
The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public
offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain
litigation against Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the
conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at
December 31, 2021 was approximately 1.62, which means the Company would receive approximately 19,993 Class
A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value
81
and is carried at zero. If a readily determinable fair value becomes available for the Class B shares, or upon the
conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a
credit to earnings.
Note 4. Loans and Asset Quality Information
The following is a summary of the major categories of total loans outstanding:
($ in thousands)
December 31, 2021
December 31, 2020
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
$
648,997
828,549
1,021,966
Real estate – mortgage – home equity loans / lines of credit
Real estate – mortgage – commercial and other
Consumer loans
Subtotal
Unamortized net deferred loan fees
Total loans
331,932
3,194,737
57,238
6,083,419
(1,704)
$ 6,081,715
11 %
13 %
17 %
782,549
570,672
972,378
5 %
306,256
53 %
2,049,203
1 %
53,955
17 %
12 %
21 %
6 %
43 %
1 %
100 %
4,735,013
100 %
(3,698)
4,731,315
Included in the line item "Commercial, financial, and agricultural" in the table above are PPP loans totaling $39.0
million and $240.5 million at December 31, 2021 and December 31, 2020, respectively. PPP loans are fully
guaranteed by the SBA. Included in unamortized net deferred loan fees are approximately $2.6 million and $6.0
million at December 31, 2021 and December 31, 2020, respectively, in unamortized net deferred loan fees
associated with PPP loans. These fees are being amortized under the effective interest method over the terms of
the loans. Accelerated amortization is recorded in the periods in which principal amounts are forgiven in
accordance with the terms of the program. Because of their fully guaranteed nature, the Company has no allocation
of allowance for loan losses established for these loans.
Included in the table above are credit card balances outstanding totaling $37.9 million and $33.2 million at
December 31, 2021 and 2020, respectively. Approximately 49% of this total are business credit cards included in
"commercial, financial and agricultural" above and the remaining 51% are personal credit cards included in
consumer loans in the table above.
Also included in the table above are non-PPP SBA loans, generally originated under the SBA 7A loan program, with
additional information on these loans presented in the table below.
($ in thousands)
Guaranteed portions of non-PPP SBA Loans included in table above
Unguaranteed portions of non-PPP SBA Loans included in table above
Total non-PPP SBA loans included in the table above
Sold portions of SBA loans with servicing retained - not included in table above
December 31,
2021
December 31,
2020
$
$
$
48,377
122,772
171,149
33,959
135,703
169,662
414,240
395,398
At December 31, 2021 and December 31, 2020, there were remaining unaccreted discounts on the retained portion
of sold non-PPP SBA loans amounting to $6.0 million and $7.3 million respectively.
Loans in the amount of $4.3 billion and $4.0 billion were pledged as collateral for certain borrowings at December
31, 2021 and December 31, 2020, respectively (see Note 9).
The loans above also include loans to executive officers and directors serving the Company at December 31, 2021
and to their associates, totaling approximately $0.6 million and $3.4 million at December 31, 2021 and 2020,
respectively. There were no new loans and advances on those loans in 2021 and repayments amounted to
$2.8 million. Management does not believe these loans involve more than the normal risk of collectability or present
other unfavorable features.
The Company has several acquired loan portfolios as a result of merger and acquisition transactions. In these
transactions, the Company recorded loans at their fair value as required by applicable accounting guidance. For
82
acquisitions completed prior to the Company's adoption of CECL, these loan portfolios included loans designated as
PCI loans, which were loans for which it was probable at acquisition that all contractually required payments would
not be collected. Upon the adoption of CECL, all PCI loans were reclassified as PCD loans, as permitted by the
CECL standard.
As of December 31, 2021, unamortized discounts on all acquired loans totaled $17.2 million. At December 31,
2020, there were remaining accretable discounts of $7.9 million, related to purchased non-impaired loans. Loan
discounts are generally amortized as yield adjustments over the respective lives of the loans, so long as the loans
perform. At December 31, 2020, the carrying value of PCI loans was $8.6 million.
The following table presents changes in the accretable yield for PCI loans under the Incurred Loss methodology
used by the Company prior to adopting CECL.
($ in thousands)
Balance at beginning of period
Accretion
Reclassification from (to) nonaccretable difference
Other, net
Balance at end of period
For the Year
Ended
December 31,
2020
For the Year
Ended
December 31,
2019
$
4,149
(1,119)
413
(545)
$
2,898
4,750
(1,486)
617
268
4,149
During 2020, the Company received $0.5 million in payments that exceeded the carrying amount of the related PCI
loans, of which $0.4 million was recognized as loan discount accretion income, $0.1 million was recorded as
additional loan interest income, and $14,000 was recorded as a recovery. During 2019, the Company received $0.4
million in payments that exceeded the carrying amount of the related PCI loans, of which $0.3 million was
recognized as loan discount accretion income and $0.1 million was recorded as additional loan interest income.
Nonperforming assets, defined as nonaccrual loans, troubled debt restructurings, loans past due 90 or more days
and still accruing interest, and foreclosed real estate, are summarized as follows:
($ in thousands)
Nonperforming assets
Nonaccrual loans
Restructured loans - accruing
Accruing loans > 90 days past due
Total nonperforming loans
Foreclosed properties
Total nonperforming assets
December 31,
2021
December 31,
2020
$
$
34,696
13,866
1,004
49,566
3,071
52,637
35,076
9,497
—
44,573
2,424
46,997
At December 31, 2021 and 2020, the Company had $1.5 million and $1.9 million in residential mortgage loans in
process of foreclosure, respectively.
At December 31, 2021 and 2020, there were no commitments to lend additional funds to debtors whose loans were
nonperforming.
83
The following table is a summary of the Company’s nonaccrual loans by major categories for the periods indicated.
($ 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
Consumer loans
Total
CECL
December 31,
2021
Nonaccrual
Loans with an
Allowance
Incurred Loss
December 31,
2020
Nonaccrual
Loans
Total
Nonaccrual
Loans
8,205
12,152
9,681
Nonaccrual
Loans with No
Allowance
$
3,947
495
137
632
643
858
—
7,648
—
12,948
$
4,040
694
8,583
89
21,748
4,898
694
16,231
89
34,696
6,048
1,333
17,191
180
35,076
There is no interest income recognized during the period on nonaccrual loans. The Company follows its nonaccrual
policy of reversing contractual interest income in the income statement when the Company places a loan on
nonaccrual status.
The following table represents the accrued interest receivables written off by reversing interest income during the
year ended December 31, 2021.
($ 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
Consumer loans
Total
For the Year Ended
December 31, 2021
195
$
6
31
14
453
—
699
$
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2021.
($ in thousands)
Commercial, financial, and
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
agricultural
$
377
93
—
—
12,152
636,375
648,997
286
632
823,585
828,549
6,571
1,488
—
4,898
1,009,009
1,021,966
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
Consumer loans
4,046
489
164
116
Total
$
11,763
Unamortized net deferred
loan fees
Total loans
124
1,496
62
3,263
718
—
—
1,004
694
329,907
331,932
16,231
89
34,696
3,176,846
56,971
3,194,737
57,238
6,032,693
6,083,419
(1,704)
$ 6,081,715
84
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2020.
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
($ 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
Consumer loans
Purchased credit impaired
$
1,464
1,101
572
—
10,146
869
1,088
2,540
180
328
42
3,111
36
112
5,271
Total
$
16,318
Unamortized net deferred
loan (fees) costs
Total loans
—
—
—
—
—
—
719
719
9,681
770,166
782,412
643
569,307
570,522
6,048
951,088
968,151
1,333
303,693
306,156
17,191
180
—
2,022,422
53,521
2,045,264
53,917
7,432
8,591
35,076
4,677,629
4,735,013
(3,698)
$ 4,731,315
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the
operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company reviews
individually evaluated loans on nonaccrual with a net book balance of $350,000 or greater for designation as
collateral dependent loans, as well as certain other loans that may still be accruing interest and/or are less than
$350,000 in size that management of the Company designates as having higher risk. These loans do not share
common risk characteristics and are not included within the collectively evaluated loans for determining the
allowance for credit losses.
The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2021.
($ in thousands)
Residential
Property
Business
Assets
Land
Commercial
Property
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
Consumer loans
Total
—
—
871
—
—
—
7,886
—
—
—
—
—
—
533
—
—
—
—
Total
Collateral-
Dependent
Loans
7,886
533
871
—
—
—
—
—
10,743
10,743
—
—
$
871
7,886
533
10,743
20,033
Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the
allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an
individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for
liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no
allowance is required.
The Company's policy is to obtain third-party appraisals on any significant pieces of collateral. For loans secured by
real estate, the Company's policy is to write nonaccrual loans down to 90% of the appraised value, which considers
estimated selling costs. For real estate collateral that is in industries that are undergoing heightened stress, the
Company often discounts the collateral values by an additional 10% - 25% due to additional discounts that are
estimated to be incurred in a near-term sale. For non real-estate collateral secured loans, the Company generally
85
writes nonaccrual loans down to 75% of the appraised value, which provides for selling costs and liquidity discounts
that are usually incurred when disposing of non real-estate collateral. For reviewed loans that are not on nonaccrual
basis, the Company assigns a specific allowance based on the parameters noted above.
The Company does not believe that there is significant over-coverage of collateral for any of the loan types noted
above.
The following table presents the activity in the ACL on loans for the year ended December 31, 2021 under the CECL
methodology.
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
($ in thousands)
As of and for the year ended December 31, 2021
Consumer
Loans
Unallocated
Total
$
11,316
5,355
8,048
2,375
23,603
1,478
213
52,388
3,067
6,140
2,584
2,580
(257)
674
(213)
14,575
Beginning balance
Adjustment for
implementation of
CECL
Allowance for Select
PCD loans
Charge-offs
Recoveries
Provisions/
(Reversals)
2,917
(3,722)
1,744
927
Ending balance
$
16,249
165
(245)
948
4,156
16,519
222
(273)
761
(2,656)
8,686
92
(400)
578
(888)
4,337
1,489
(2,295)
533
7,269
30,342
10
(667)
358
803
2,656
—
—
—
—
—
4,895
(7,602)
4,922
9,611
78,789
86
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2020
under the Incurred Loss methodology.
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
($ in thousands)
As of and for the year ended December 31, 2020
Consumer
loans
Unallocated
Total
Beginning balance
$
4,553
Charge-offs
Recoveries
Provisions
(5,608)
745
11,626
Ending balance
$
11,316
1,976
(51)
1,552
1,878
5,355
3,832
(478)
754
3,940
8,048
1,127
(524)
487
1,285
2,375
8,938
(968)
621
15,012
23,603
972
(873)
294
1,085
1,478
—
—
—
213
213
21,398
(8,502)
4,453
35,039
52,388
Ending balances as of December 31, 2020: Allowance for loan losses
Individually evaluated for
impairment
$
3,546
30
800
—
2,175
—
—
6,551
Collectively evaluated for
impairment
$
Purchased credit impaired $
7,742
28
5,325
—
7,141
107
2,375
—
21,428
—
1,475
3
213
—
45,699
138
Loans receivable as of December 31, 2020:
Ending balance – total
$ 782,549
Unamortized net deferred
loan (fees) costs
Total loans
570,672
972,378
306,256
2,049,203
53,955
—
4,735,013
(3,698)
$ 4,731,315
—
—
—
36,281
4,690,141
8,591
Ending balances as of December 31, 2020: Loans
Individually evaluated for
impairment
Collectively evaluated for
impairment
$
7,700
677
9,303
15
18,582
4
$ 774,712
569,845
958,848
306,141
2,026,682
53,913
Purchased credit impaired $
137
150
4,227
100
3,939
38
87
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2019
under the Incurred Loss methodology.
($ 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
Consumer
loans
Unallo-
cated
Total
As of and for the year ended December 31, 2019
Beginning balance
$
2,889
Charge-offs
Recoveries
Provisions
Ending balance
$
(2,473)
980
3,157
4,553
2,243
(553)
1,275
(989)
1,976
5,197
(657)
705
(1,413)
3,832
1,665
(307)
629
(860)
1,127
7,983
(1,556)
575
1,936
8,938
952
110
21,039
(757)
—
(6,303)
235
—
542
(110)
4,399
2,263
972
—
21,398
Ending balances as of December 31, 2019: Allowance for loan losses
Individually evaluated for
impairment
Collectively evaluated for
impairment
Purchased credit impaired
$
$
$
1,791
2,720
42
Loans receivable as of December 31, 2019:
Ending balance – total
$ 504,271
Unamortized net deferred loan
(fees) costs
Total loans
50
750
—
983
—
—
3,574
1,926
—
2,976
106
1,127
—
7,931
24
961
—
17,641
11
—
183
530,866
1,105,014
337,922
1,917,280
56,172
—
4,451,525
1,941
4,453,466
Ending balances as of December 31, 2019: Loans
Individually evaluated for
impairment
Collectively evaluated for
impairment
Purchased credit impaired
$
4,957
796
9,546
333
9,570
—
—
25,202
$ 499,101
529,904
1,090,125
337,366
1,901,080
56,083
—
4,413,659
$
213
166
5,343
223
6,630
89
—
12,664
88
The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as
of December 31, 2020 under the Incurred Loss methodology.
($ 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
Consumer loans
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
Consumer loans
Total impaired loans with allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
$
3,688
4,325
554
4,115
15
694
4,456
27
11,763
13,107
4
4
$
20,139
22,613
—
—
—
—
—
—
—
750
308
4,447
264
9,026
1
14,796
$
4,012
4,398
3,546
5,139
123
5,188
—
6,819
—
131
5,361
—
7,552
—
$
16,142
17,442
30
800
—
2,175
—
6,551
502
5,186
21
5,786
—
16,634
Interest income recorded on impaired loans during the year ended December 31, 2020 was $1.1 million, and
reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest
income recorded on accruing TDRs.
89
The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as
of December 31, 2019 under the Incurred Loss methodology.
($ in thousands)
Impaired loans with no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Commercial, financial, and agricultural
$
16
19
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
Consumer loans
Total impaired loans with no allowance
221
4,300
333
2,643
—
$
7,513
263
4,539
357
3,328
—
8,506
—
—
—
—
—
—
—
74
366
4,415
147
3,240
—
8,242
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
Consumer loans
Total impaired loans with allowance
$
4,941
4,995
1,791
1,681
575
5,246
—
6,927
—
575
5,469
—
7,914
—
50
750
—
983
—
586
6,206
55
5,136
—
$
17,689
18,953
3,574
13,664
Interest income recorded on impaired loans during the year ended December 31, 2019 was $1.3 million, and
reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest
income recorded on accruing TDRs.
Credit Quality Indicators
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.
90
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 Company.
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 (<$500,000) with a well-defined weakness, such as exceptions
of any kind with no mitigating factors, history of paying outside the terms of the
note, insufficient income to support the current level of debt, etc.
Special Mention:
Classified:
The following table presents the Company’s recorded investment in loans by credit quality indicators by year of
origination or renewal as of December 31, 2021 under the CECL methodology. Acquired loans are presented in the
year originated, not in the year of acquisition.
91
($ in thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Total
Term Loans by Year of Origination
Commercial, financial, and
agricultural
Pass
Special Mention
Classified
Total commercial,
financial, and
agricultural
Real estate – construction,
land development & other
land loans
Pass
Special Mention
Classified
Total real estate –
construction, land
development & other
land loans
Real estate – mortgage –
residential (1-4 family) first
mortgages
Pass
Special Mention
Classified
Total real estate –
mortgage – residential
(1-4 family) first
mortgages
Real estate – mortgage –
home equity loans / lines of
credit
Pass
Special Mention
Classified
Total real estate –
mortgage – home
equity loans / lines of
credit
Real estate – mortgage –
commercial and other
$ 204,945
225
1,609
138,540
1,255
793
71,369
1,313
1,703
66,645
2,729
7,096
16,009
225
511
17,492
9
96
112,933
2,348
1,152
627,933
8,104
12,960
206,779
140,588
74,385
76,470
16,745
17,597
116,433
648,997
573,613
41
1,541
133,888
737
49
69,066
5,095
47
12,455
110
83
9,764
104
14
8,190
2
4
13,737
9
—
820,713
6,098
1,738
575,195
134,674
74,208
12,648
9,882
8,196
13,746
828,549
241,619
888
419
224,617
615
156
120,097
516
535
82,531
229
1,185
86,074
323
653
234,950
3,237
11,246
11,051
94
931
1,000,939
5,902
15,125
242,926
225,388
121,148
83,945
87,050
249,433
12,076
1,021,966
3,111
194
75
498
—
97
439
15
71
1,304
—
—
245
—
—
1,649
19
607
317,319
1,341
4,948
324,565
1,569
5,798
3,380
595
525
1,304
245
2,275
323,608
331,932
Pass
1,328,156
796,992
355,885
211,118
197,165
197,659
66,104
3,153,079
Special Mention
Classified
Total real estate –
mortgage –
commercial and other
Consumer loans
Pass
Special Mention
Classified
1,759
7,147
4,849
413
5,801
2,110
3,741
6,025
2,072
3,897
1,801
603
1,440
—
21,463
20,195
1,337,062
802,254
363,796
220,884
203,134
200,063
67,544
3,194,737
14,960
25,431
2,965
1,722
673
525
10,810
57,086
—
—
4
73
—
—
—
8
—
—
—
25
—
42
4
148
Total consumer loans
14,960
25,508
2,965
1,730
673
550
10,852
57,238
Total
$ 2,380,302
1,329,007
637,027
396,981
317,729
478,114
544,259
6,083,419
Unamortized net deferred
loan fees
Total loans
(1,704)
6,081,715
92
At December 31, 2021, as derived from the table above, the Company had $43.1 million in loans graded as Special
Mention and $56.0 million in loans graded as Classified, which includes all nonaccrual loans.
In the table above, substantially all of the "Classified Loans" have grades of 7 or Fail, with those categories having
similar levels of risk. The amount of revolving lines of credit that converted to term loans during the period was
immaterial.
The following table presents the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2020 under the Incurred Loss methodology.
($ 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
Consumer loans
Purchased credit impaired
Total
Unamortized net deferred loan (fees) costs
Total loans
Troubled Debt Restructurings
Pass
Special
Mention
Loans
Classified
Accruing
Loans
Classified
Nonaccrual
Loans
Total
$
762,091
9,553
1,087
9,681
782,412
560,845
7,877
1,157
643
570,522
943,455
7,609
11,039
6,048
968,151
297,795
1,988,684
53,488
6,901
1,468
34,588
80
85
5,560
4,801
169
1,605
1,333
306,156
17,191
2,045,264
180
—
53,917
8,591
$ 4,613,259
61,260
25,418
35,076
4,735,013
(3,698)
4,731,315
The restructuring of a loan is considered a TDR 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, extension of terms and other actions intended to minimize potential losses.
The vast majority of the Company’s TDRs modified during the years ended December 31, 2021, 2020, and 2019
related to interest rate reductions combined with extension of terms. The Company does not generally grant
principal forgiveness.
The Company’s TDRs can be classified as either nonaccrual or accruing based on the loan’s payment status. The
TDRs that are nonaccrual are reported within the nonaccrual loan totals presented previously.
93
The following table presents information related to loans modified in a TDR during the year ended December 31,
2021.
($ in thousands, except number of contracts)
TDRs – Accruing
For the year ended December 31, 2021
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
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
Consumer loans
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
Consumer loans
— $
—
1
—
—
—
5
1
1
—
4
—
—
—
33
—
—
—
—
—
33
—
—
—
1,438
1,435
75
263
—
1,729
—
75
263
—
1,729
—
Total TDRs arising during period
12 $
3,538
3,535
The following table presents information related to loans modified in a TDR during the year ended December 31,
2020.
($ in thousands, except number of contracts)
TDRs – Accruing
For the year ended December 31, 2020
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
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
Consumer loans
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
Consumer loans
2 $
143
143
1
2
—
—
1
1
—
—
—
5
—
67
75
—
—
4
72
—
—
—
67
78
—
—
4
72
—
—
—
5,977
—
5,977
—
Total TDRs arising during period
12 $
6,338
6,341
94
The following table presents information related to loans modified in a TDR during the year ended December 31,
2019.
($ in thousands, except number of contracts)
TDRs – Accruing
For the year ended December 31, 2019
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
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
Consumer loans
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
Consumer loans
Total TDRs arising during period
.
2 $
—
3
—
1
—
—
—
—
—
—
—
395
—
387
—
274
—
—
—
—
—
—
—
395
—
391
—
274
—
—
—
—
—
—
—
6 $
1,056
1,060
Accruing TDRs that were modified in the previous 12 months and that defaulted during the years ended December
31, 2021, 2020, and 2019 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.
For the Year Ended
December 31, 2021
For the Year Ended
December 31, 2020
For the Year Ended
December 31, 2019
Number
of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number
of
Contracts
Recorded
Investment
— $
—
—
—
— $
—
—
1
1
—
274
274
1
—
1
93
—
93
($ in thousands)
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
Concentration of Credit Risk
Most of the Company's business activity is with customers located within the markets where it has banking
operations. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy
within its markets. Approximately 88% of the Company's loan portfolio is secured by real estate and is therefore
susceptible to changes in real estate valuations.
95
Allowance for Credit Losses - Unfunded Loan Commitments
In addition to the ACL on loans, the Company maintains an allowance for lending-related commitments such as
unfunded loan commitments and letters of credit. Under CECL, the Company estimates expected credit losses over
the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit,
unless that obligation is unconditionally cancellable by the Company. The allowance for lending-related
commitments on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate
includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived
from internal information, and an estimate of expected credit losses on commitments expected to be funded over its
estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans,
and are discussed in Note 1. The allowance for credit losses for unfunded loan commitments of $13.5 million and
$0.6 million at December 31, 2021 and December 31, 2020, respectively, is separately classified on the balance
sheet within the line items "Other Liabilities." The following table presents the balance and activity in the allowance
for credit losses for unfunded loan commitments for the year ended December 31, 2021.
($ in thousands)
Beginning balance at December 31, 2020
Adjustment for implementation of CECL on January 1, 2021
Charge-offs
Recoveries
Day 2 provision for credit losses on unfunded commitments acquired from Select
Provision for credit losses on changes in unfunded commitments
Ending balance at December 31, 2021
Allowance for Credit Losses - Securities Held to Maturity
As previously discussed, there was no ACL for securities HTM at December 31, 2021.
Note 5. Premises and Equipment
Premises and equipment at December 31, 2021 and 2020 consisted of the following:
($ in thousands)
Land
Buildings
Furniture and equipment
Leasehold improvements
Total cost
Less accumulated depreciation and amortization
Total premises and equipment
Total Allowance for
Credit Losses -
Unfunded Loan
Commitments
$
$
582
7,504
—
—
3,982
1,438
13,506
2021
2020
$
45,398
112,622
31,099
2,028
38,584
103,232
30,097
3,054
191,147
174,967
(55,055)
(54,465)
$
136,092
120,502
Depreciation expense amounted to $6.2 million, $5.8 million, and $5.8 million for the years ended December 31,
2021, 2020, and 2019, respectively, and is recorded in occupancy expense.
96
Note 6. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible
assets as of December 31, 2021 and December 31, 2020 and the carrying amount of unamortizable intangible
assets as of those same dates.
($ in thousands)
Amortizable intangible assets:
Customer lists
Core deposit intangibles
SBA servicing asset
Other
Total
Unamortizable intangible assets:
Goodwill
December 31, 2021
December 31, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
$
2,700
29,050
11,932
100
43,782
1,386
18,076
6,460
33
25,955
7,613
28,440
9,976
1,403
47,432
2,814
23,832
4,188
1,232
32,066
$
364,263
239,272
Customer lists are generally amortized over 5 years and core deposit intangibles are generally amortized over 10
years, both at an accelerated rate.
As discussed in Note 1, SBA servicing assets are recorded for the portions of SBA loans that the Company has sold
but continues to service for a fee. Servicing assets are initially recorded at fair value, amortized over the expected
lives of the related loans, and are periodically tested for impairment. SBA guarantee servicing fees and SBA
servicing asset amortization expense are both recorded within noninterest income within the line item "Other service
charges, commissions, and fees." As derived from the table above, the Company had a SBA servicing asset at
December 31, 2021 with a remaining book value of $5.5 million. The Company recorded $2.0 million and $2.2
million in servicing assets associated with the guaranteed portion of SBA loans sold during 2021 and 2020,
respectively. During 2021, 2020, and 2019, the Company recorded $3.9 million, $3.3 million, and $2.6 million,
respectively, in SBA guarantee servicing fee income, and $2.3 million, $1.8 million, and $1.3 million, respectively, in
related amortization expense. At December 31, 2021 and 2020, the Company serviced SBA for others totaling
$414.2 million and $395.4 million, respectively. There were no other loans serviced for others in any year presented.
Goodwill is evaluated for impairment on at least an annual basis, with the annual evaluation occurring on October
31st of each year. Goodwill is also evaluated for impairment any time there is a triggering event indicating that
impairment may have occurred. During 2020, in addition to the annual impairment evaluation, due to the COVID-19
pandemic, the Company evaluated its goodwill for impairment at each of the first three quarter ends of 2020, with
each evaluation indicating that there was no impairment. Due to improving economic conditions and increases in
the Company's stock price and market capitalization at year end 2020 and throughout 2021, no triggering events
were identified, and therefore, the Company did not perform interim impairment evaluations subsequent to the third
quarter of 2020. Each of the Company's goodwill impairment evaluations for the periods presented, including the
most recent October 2021 evaluation, indicated that there was no goodwill impairment.
The following table presents the changes in carrying amounts of goodwill:
($ in thousands)
Balance at December 31, 2019
Additions from acquisition of Magnolia Financial
Balance at December 31, 2020
Additions from acquisition of Select
Reduction from disposal of First Bank Insurance Services, Inc.
Balance at December 31, 2021
Total Goodwill
234,368
4,904
239,272
132,356
(7,365)
364,263
$
$
97
In addition to the changes in goodwill presented above, activity for other intangibles related to transactions since
January 1, 2020 are presented as follows. Refer to Note 2 for additional discussion of the transactions.
•
•
•
In connection with the Select acquisition on October 15, 2021, the Company recorded $9.2 million in core
deposit intangibles.
Related to the sale of First Bank Insurance Services, Inc., customer lists with a carrying value of $2.8 million
were derecognized.
In connection with the acquisition of Magnolia Financial on September 1, 2020, the Company recorded
$1.6 million in other amortizable intangible assets.
Amortization expense of all other intangible assets, excluding the SBA servicing asset, totaled $3.5 million, $4.0
million, and $4.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The following table presents the estimated amortization expense schedule related to acquisition-related amortizable
intangible assets for each of the five calendar years ending December 31, 2026 and the estimated amount
amortizable thereafter. These amounts will be recorded as "Intangibles amortization expense" within the noninterest
expense section of the Consolidated Statements of Income. These estimates are subject to change in future
periods to the extent management determines it is necessary to make adjustments to the carrying value or
estimated useful lives of amortizable intangible assets.
($ in thousands)
2022
2023
2024
2025
2026
Thereafter
Total
Note 7. Income Taxes
Estimated
Amortization
Expense
$
$
3,684
2,545
1,718
1,358
962
2,088
12,355
The components of income tax expense for the years ended December 31, 2021, 2020, and 2019 are as follows:
($ in thousands)
Current
- Federal
- State
Deferred
- Federal
- State
Total
2021
2020
2019
$
25,742
3,733
(4,247)
(553)
27,799
3,909
(8,893)
(1,161)
19,920
2,499
1,572
239
$
24,675
21,654
24,230
98
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets
(liabilities) at December 31, 2021 and 2020 are presented below:
($ in thousands)
Deferred tax assets:
Allowance for credit losses on loans
Allowance for credit losses on unfunded commitments
Excess book over tax pension plan cost
Deferred compensation
Federal & state net operating loss and tax credit carryforwards
Accruals, book versus tax
Pension
Unrealized losses on securities available for sale
Foreclosed real estate
Basis differences in assets acquired in FDIC transactions
Purchase accounting adjustments
Equity compensation
Partnership investments
Leases
SBA servicing asset
All other
Gross deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Loan fees
Depreciable basis of fixed assets
Amortizable basis of intangible assets
FHLB stock dividends
Trust preferred securities
Unrealized gain on securities available for sale
Gross deferred tax liabilities
2021
2020
$
18,102
3,103
467
571
206
4,235
81
7,369
20
504
4,076
694
310
108
108
101
40,055
(10)
40,045
(2,840)
(5,790)
(10,328)
—
(453)
—
(19,411)
12,031
—
367
257
282
3,232
418
—
123
647
—
661
258
120
358
3
18,757
(14)
18,743
(1,011)
(4,809)
(7,965)
(236)
(473)
(4,699)
(19,193)
(450)
Net deferred tax asset (liability) - included in other assets (liabilities)
$
20,634
The valuation allowances for 2021 and 2020 related primarily to state net operating loss carryforwards. It is
management’s belief that the realization of the remaining net deferred tax assets is more likely than not.
The Company had no significant uncertain tax positions, and thus no reserve for uncertain tax positions has been
recorded. Additionally, the Company determined that it has no material unrecognized tax benefits that if recognized
would affect the effective tax rate. The Company’s general policy is to record tax penalties and interest as a
component of “other operating expenses.”
The Company 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 2018. There are no indications of any material adjustments relating to any examination currently being
conducted by any taxing authority.
Retained earnings at December 31, 2021 and 2020 included approximately $6.9 million representing pre-1988 tax
bad debt reserve base year amounts for which no deferred income tax liability has been provided since these
reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a
portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure
to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other
distributions in dissolution, liquidation or redemption of the Bank’s stock.
99
The following is a reconcilement of federal income tax expense at the statutory rate of 21% at December 31, 2021
and December 31, 2020 and December 31, 2019, to the income tax provision reported in the financial statements.
($ in thousands)
Tax provision at statutory rate
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income
Low income housing tax credits
Bank-owned life insurance income
Non-deductible interest expense
State income taxes, net of federal benefit
Nondeductible merger expenses
Change in valuation allowance
Impact of tax reform
Other, net
Total
Note 8. Deposits
2021
2020
2019
$
25,266
21,657
24,418
(1,589)
(1,229)
(589)
14
2,472
242
(10)
—
98
(1,050)
(1,186)
(772)
(532)
23
2,117
—
(20)
—
231
(756)
(538)
43
2,178
—
4
(73)
140
$
24,675
21,654
24,230
At December 31, 2021, the scheduled maturities of time deposits were as follows:
($ in thousands)
2022
2023
2024
2025
2026
Thereafter
$
735,619
102,337
23,358
21,405
19,708
10,012
$
912,439
Deposits received from executive officers and directors and their associates totaled approximately $2.5 million and
$4.4 million at December 31, 2021 and 2020, respectively.
Deposit overdrafts of approximately $0.9 million and $0.5 million at December 31, 2021 and 2020 are included
within "Loans" on the Consolidated Balance Sheets.
As of December 31, 2021 and 2020, the Company held $363.8 million and $375.7 million, respectively, in time
deposits of more than $250,000 (which is the current FDIC insurance limit for insured deposits as of December 31,
2021). Brokered deposits were $7.4 million and $20.2 million at December 31, 2021 and 2020, respectively. Total
reciprocal deposits through CDARS and ICS were $12.6 million and $6.8 million at December 31, 2021 and 2020,
respectively.
100
Note 9. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31, 2021
and 2020 - dollars are in thousands:
Description – 2021
FHLB Principal Reducing Credit
Due date
7/24/2023
Call Feature
None
FHLB Principal Reducing Credit
12/22/2023
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
Trust Preferred Securities
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
1/7/2035
Trust Preferred Securities
9/20/2034
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
Quarterly by Company
beginning 9/20/2009
2021 Amount
$
79
952
225
44
166
166
342
20,620
25,774
10,310
12,372
Total borrowings / weighted average rate as of December 31, 2021
Unamortized discount on acquired borrowings
Total borrowings
71,050
(3,664)
67,386
$
Interest Rate
1.00% fixed
1.25% fixed
0.25% fixed
0.00% fixed
1.00% fixed
1.00% fixed
0.50%fixed
2.83% at 12/31/21
adjustable rate
3 month LIBOR +
2.70%
1.59% at 12/31/21
adjustable rate
3 month LIBOR +
1.39%
2.12% at 12/31/21
adjustable rate
3 month LIBOR
+2.00%
2.27% at 12/31/21
adjustable rate
3 month LIBOR +
2.15%
2.24%
101
Description – 2020
FHLB Principal Reducing Credit
Due date
7/24/2023
Call Feature
None
FHLB Principal Reducing Credit
12/22/2023
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
1/15/2026
6/26/2028
7/17/2028
8/18/2028
8/22/2028
FHLB Principal Reducing Credit
12/20/2028
None
None
None
None
None
None
None
Other Borrowing
Trust Preferred Securities
4/7/2022
1/23/2034
None
Quarterly by Company
beginning 1/23/2009
Trust Preferred Securities
6/15/2036
Trust Preferred Securities
1/7/2035
Quarterly by Company
beginning 6/15/2011
Quarterly by Company
beginning 1/7/2010
2020 Amount
$
124
991
5,500
235
49
174
174
355
103
20,620
25,774
10,310
Total borrowings / weighted average rate as of December 31, 2020
Unamortized discount on acquired borrowings
Total borrowings
64,409
(2,580)
61,829
$
Interest Rate
1.00% fixed
1.25% fixed
1.98% fixed
0.25% fixed
0.00% fixed
1.00% fixed
1.00% fixed
0.50% fixed
1.00% fixed
2.91% at 12/31/20
adjustable rate
3 month LIBOR
+2.70%
1.61% at 12/31/20
adjustable rate
3 month LIBOR +
1.39%
2.24% at 12/31/20
adjustable rate
3 month LIBOR +
2.00%
2.22%
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 table there were no short-term borrowings (original maturity terms of less than 3 months) at December
31, 2021 or December 31, 2020.
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%.
In the above tables, the $12.4 million in borrowings due on September 20, 2034 relate to borrowings structured as
trust preferred capital securities that were issued by New Century Statutory Trust I, an unconsolidated subsidiary of
the Company. The Company acquired Select Bancorp, Inc. and its subsidiary, New Century Statutory Trust I, on
102
October 15, 2021. 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 September 20,
2009. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus
2.15%.
At December 31, 2021, the Company had three sources of readily available borrowing capacity – 1) an
approximately $866 million line of credit with the FHLB, of which $2 million was outstanding at December 31, 2021
and $8 million was outstanding at December 31, 2020, 2) a $100 million federal funds line of credit with a
correspondent bank, of which none was outstanding at December 31, 2021 or 2020, and 3) an approximately $138
million line of credit through the Federal Reserve discount window, of which none was outstanding at December 31,
2021 or 2020.
The Company’s line of credit with the FHLB totaling approximately $866 million can be structured as either short-
term or long-term borrowings, depending on the particular funding or liquidity needs and is secured by the
Company’s FHLB stock and a blanket lien on most of its real estate loan portfolio.
The Company’s correspondent bank relationship allows the Company to purchase up to $100 million in federal
funds on an overnight, unsecured basis (federal funds purchased). The Company had no borrowings outstanding
under this line at December 31, 2021 or 2020.
The Company has a line of credit with the Federal Reserve 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, 2021, the available line of credit was approximately $138
million. The Company had no borrowings outstanding under this line of credit at December 31, 2021 or 2020.
Note 10. Leases
The Company enters into leases in the normal course of business. As of December 31, 2021, the Company leased
17 branch offices for which the land and buildings are leased and 10 branch offices for which the land is leased but
the building is owned. The Company also leases office space for several operational departments. All of the
Company’s leases are operating leases under applicable accounting standards and the lease agreements have
maturity dates ranging from March 2022 through May 2076, some of which include options for multiple five- and ten-
year extensions. The Company includes lease extension options in the lease term if, after considering relevant
economic, market, and strategic factors, it is reasonably certain the Company will exercise the option. The weighted
average remaining life of the lease term for these leases was 19.4 years as of December 31, 2021. Certain of the
Company's lease agreements include variable lease payments based on changes in inflation, with the impact of that
factor being insignificant to the Company's total lease expense. As permitted by applicable accounting standards,
the Company has elected not to recognize leases with original lease terms of 12 months or less (short-term leases)
on the Company's Consolidated Balance Sheets. The short-term lease cost for each period presented was
insignificant.
Leases are classified as either operating or finance leases at the lease commencement date, and as previously
noted, all of the Company's leases have been determined to be operating leases. Lease expense for operating
leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets
represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the
Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are
recognized at the lease commencement date based on the estimated present value of lease payments over the
lease term.
The Company uses its incremental borrowing rate, on a collateralized basis, at lease commencement to calculate
the present value of lease payments when the rate implicit in the lease is not known. The weighted average
discount rate for leases was 2.87% as of December 31, 2021.
The right-of-use assets and lease liabilities were $20.7 million and $21.2 million as of December 31, 2021,
respectively, and were $17.5 million and $17.9 million as of December 31, 2020, respectively.
Total operating lease expense charged to operations under all operating lease agreements was $2.6 million in 2021,
$2.9 million in 2020, and $2.6 million in 2019.
103
Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31,
2021 are as follows:
($ in thousands)
Year ending December 31:
2022
2023
2024
2025
2026
Thereafter
Total undiscounted lease payments
Less effect of discounting
$
2,383
2,460
2,164
1,707
1,685
22,499
32,898
(11,706)
Present value of estimated lease payments (lease liability)
$
21,192
Note 11. Employee Benefit Plans
401(k) Plan. The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal Revenue
Code ("IRC"). New employees who have met the age requirement are automatically enrolled in the plan at a 6%
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, not to exceed IRC limits. The Company’s matches 100% of the
employee’s contribution up to 6%. The Company’s matching contribution expense was $4.3 million, $4.3 million, and
$4.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. Although discretionary
contributions by the Company are permitted by the plan, the Company did not make any such contributions in the
years presented. The Company’s matching and discretionary contributions are made according to the same
investment elections each participant has established for their deferral contributions.
Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the “Pension
Plan”) that qualified under Section 401(a) of the IRC. The Pension Plan provided for a monthly payment, at normal
retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual Compensation (five
highest consecutive calendar years’ earnings out of the last ten years of employment) multiplied by the employee’s
years of service not in excess of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of the
average social security wage base multiplied by years of service not in excess of 35 years. Benefits were fully
vested after five years of service. Effective December 31, 2012, the Company froze the Pension Plan for all
participants.
The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants
and are intended to be deductible for income tax purposes. As discussed below, the contributions are invested to
provide for benefits under the Pension Plan. The Company did not make any contributions to the Pension Plan for
the years presented. The Company also does not expect to contribute to the Pension Plan in 2022.
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between the
two amounts representing the funded status of the Pension Plan as of the end of the respective year.
104
($ in thousands)
Change in benefit obligation
2021
2020
2019
Benefit obligation at beginning of year
$
44,750
41,592
36,354
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
—
981
(2,041)
(2,033)
—
1,223
3,788
—
1,482
5,492
(1,853)
(1,736)
41,657
44,750
41,592
48,167
(1,230)
—
43,824
6,196
—
39,170
6,390
—
(2,033)
(1,853)
(1,736)
44,904
48,167
43,824
Funded status at end of year
$
3,247
3,417
2,232
The accumulated benefit obligation related to the Pension Plan was $41.7 million, $44.8 million, and $41.6 million at
December 31, 2021, 2020, and 2019, respectively.
The following table presents information regarding the amounts recognized in the Consolidated Balance Sheets at
December 31, 2021 and 2020 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands)
Other assets
2021
2020
$
3,247
3,417
The following table presents information regarding the amounts recognized in accumulated other comprehensive
income (loss) (“AOCI”) at December 31, 2021 and 2020, as it relates to the Pension Plan.
($ in thousands)
Net loss
Prior service cost
Amount recognized in AOCI before tax effect
Tax benefit
Net amount recognized as decrease to AOCI
2021
2020
$
(1,441)
(1,771)
—
—
(1,441)
(1,771)
331
407
$
(1,110)
(1,364)
The following table reconciles the beginning and ending balances of AOCI at December 31, 2021 and 2020, as it
relates to the Pension Plan:
($ in thousands)
Accumulated other comprehensive loss at beginning of fiscal year
Net (loss) gain arising during period
Amortization of unrecognized actuarial loss
Tax benefit of changes during the year, net
2021
2020
$
(1,364)
(2,866)
(247)
1,107
577
(76)
843
(448)
Accumulated other comprehensive loss at end of fiscal year
$
(1,110)
(1,364)
105
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension
Plan:
($ in thousands)
Prepaid pension cost as of beginning of fiscal year
Net periodic pension cost for fiscal year
Actual employer contributions
Prepaid pension asset as of end of fiscal year
2021
2020
$
5,188
(499)
—
$
4,689
5,954
(766)
—
5,188
Net pension cost for the Pension Plan included the following components for the years ended December 31, 2021,
2020, and 2019:
($ in thousands)
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 cost
2021
2020
2019
$
$
—
981
—
1,223
—
1,482
(1,059)
(1,300)
(1,562)
577
499
843
766
977
897
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, 2022
Year ending December 31, 2023
Year ending December 31, 2024
Year ending December 31, 2025
Year ending December 31, 2026
Years ending December 31, 2027-2031
Estimated
benefit
payments
$
1,919
1,976
2,029
2,112
2,149
11,086
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 as Trustee.
In 2018, the Pension Plan adopted a liability-driven investment strategy to help meet these objectives. This 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.
The fair values of the Company’s pension plan assets at December 31, 2021, by asset category, were as follows:
($ in thousands)
Cash and cash equivalents
Investment funds
Fixed income funds
Total
Total Fair Value at
December 31,
2021
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
267
44,637
44,904
106
—
—
—
267
44,637
44,904
—
—
—
The fair values of the Company’s pension plan assets at December 31, 2020, by asset category, were as follows:
($ in thousands)
Cash and cash equivalents
Investment funds
Fixed income funds
Total
Total Fair Value at
December 31,
2020
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
337
47,830
48,167
—
—
—
337
47,830
48,167
—
—
—
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, 2021 and 2020.
- Cash and cash equivalents: 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 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 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
2021
2020
2019
Projected benefit obligation at beginning of year
$
5,982
5,638
5,794
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Projected benefit obligation at end of year
Plan assets
Funded status at end of year
—
119
(1,119)
(322)
4,660
—
—
158
517
(331)
5,982
—
—
219
23
(398)
5,638
—
$
(4,660)
(5,982)
(5,638)
The accumulated benefit obligation related to the SERP was $4.7 million, $6.0 million, and $5.6 million at December
31, 2021, 2020, and 2019, respectively.
The following table presents information regarding the amounts recognized in the Consolidated Balance Sheets at
December 31, 2021 and 2020 as it relates to the SERP, excluding the related deferred tax assets.
107
($ in thousands)
Other liabilities
2021
2020
$
(4,660)
(5,982)
The following table presents information regarding the amounts recognized in AOCI at December 31, 2021 and
2020, as it relates to the SERP:
($ in thousands)
Net gain (loss)
Prior service cost
Amount recognized in AOCI before tax effect
Tax (expense) benefit
2021
2020
$
1,088
—
1,088
(250)
Net amount recognized as (decrease) increase to AOCI
$
838
(46)
—
(46)
11
(35)
The following table reconciles the beginning and ending balances of AOCI at December 31, 2021 and 2020, as it
relates to the SERP:
($ in thousands)
2021
2020
Accumulated other comprehensive income (loss) at beginning of fiscal year
$
(35)
Net gain (loss) arising during period
Prior service cost
Amortization of unrecognized actuarial (loss) gain
Amortization of prior service cost and transition obligation
Tax (expense) benefit related to changes during the year, net
1,119
—
15
—
(261)
Accumulated other comprehensive income (loss) at end of fiscal year
$
838
484
(517)
—
(157)
—
155
(35)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the SERP:
($ in thousands)
Accrued liability as of beginning of fiscal year
Net periodic pension cost for fiscal year
Benefits paid
Accrued liability as of end of fiscal year
2021
2020
$
(5,936)
(6,266)
(134)
322
(1)
331
$
(5,748)
(5,936)
Net pension cost for the SERP included the following components for the years ended December 31, 2021, 2020,
and 2019:
($ in thousands)
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
2021
2020
2019
$
$
—
119
15
134
—
158
(157)
1
—
219
(163)
56
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, 2022
Year ending December 31, 2023
Year ending December 31, 2024
Year ending December 31, 2025
Year ending December 31, 2026
Years ending December 31, 2027-2031
108
Estimated
benefit
payments
$
252
249
246
269
273
1,395
Applicable to both Plans
The components of net periodic benefit cost other than the service cost component are included in the line item
"Other operating expenses" in the Consolidated Statements of Income.
The following assumptions were used in determining the actuarial information for the Pension Plan and the SERP
for the years ended December 31, 2021, 2020, and 2019:
2021
2020
2019
Pension
Plan
SERP
Pension
Plan
SERP
Pension
Plan
SERP
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
2.24%
2.04%
3.03%
2.89%
4.08%
3.92%
2.62%
2.48%
2.24%
2.04%
3.03%
2.89%
2.24%
n/a
n/a
n/a
3.03%
n/a
n/a
n/a
4.08%
n/a
n/a
n/a
The Company’s discount rate policy for the Pension Plan is based on a calculation of the Company’s expected
pension payments, with those payments discounted using the FTSE yield curve (formerly called the Citigroup
Pension Index yield curve) that matches the specific expected cash flows of the Pension Plan. The discount rate
policy for the SERP is to use the FTSE yield curve that matches the expected cash flows of the SERP.
Note 12. Commitments and Contingencies
See Note 10 with respect to future obligations under operating leases.
In the normal course of business, there are various outstanding commitments to extend credit that are not reflected
in the financial statements. The same credit policies are used to make such commitments as are used for loans,
including obtaining collateral at exercise of the commitment. Commitments may expire without being used. The
following table presents the Company’s outstanding loan commitments at December 31, 2021 and December 31,
2020.
($ in thousands)
Loan commitments
Unused lines of credit
Total
December 31, 2021
December 31, 2020
Fixed Rate
Variable
Rate
Total
Fixed Rate
Variable
Rate
Total
$ 389,758
230,521
620,279
273,693
1,176,803
1,450,496
238,745
188,014
94,218
332,963
900,046
1,088,060
$ 663,451
1,407,324
2,070,775
426,759
994,264
1,421,023
At December 31, 2021 and 2020, the Company had $21.3 million and $14.1 million, respectively, in standby letters
of credit outstanding. The Company has no carrying amount for these standby letters of credit at either of those
dates. The nature of the standby letters of credit is a 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 Company maintains an ACL for unfunded loan commitments which is included in the balance of other liabilities
in the Consolidated Balance Sheets. The ACL for unfunded loan commitments is determined as part of the quarterly
ACL analysis. See Note 1 for further detail.
The Company also periodically invests in limited partnerships and LLCs primarily for the purposes of fulfilling CRA
requirements and obtaining tax credits. As of December 31, 2021, the Company had a remaining funding
commitments of $27.4 million related to these investments.
109
The Company, in the normal course of business, may be subject to various pending and threatened lawsuits in
which claims for monetary damages are asserted. The Company is not involved in any legal proceedings which, in
management’s opinion, could have a material effect on the consolidated financial position of the Company.
Note 13. Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal and most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions
that market participants would use in pricing an asset or liability.
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2021.
Description of Financial Instruments ($ in thousands)
Recurring
Securities available for sale:
Fair Value at
December 31,
2021
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Government-sponsored enterprise securities
$
69,179
Mortgage-backed securities
Corporate bonds
2,514,805
46,430
Total available for sale securities
$
2,630,414
—
—
—
—
69,179
2,514,805
46,430
2,630,414
Presold mortgages in process of settlement
$
19,257
19,257
Nonrecurring
Individually evaluated loans
Foreclosed real estate
$
11,583
364
—
—
—
—
—
—
—
—
—
—
11,583
364
110
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2020.
Description of Financial Instruments ($ in thousands)
Recurring
Securities available for sale:
Fair Value at
December 31,
2020
Quoted Prices
in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Government-sponsored enterprise securities
$
70,206
Mortgage-backed securities
Corporate bonds
1,337,706
45,220
Total available for sale securities
$
1,453,132
—
—
—
—
70,206
1,337,706
45,220
1,453,132
Presold mortgages in process of settlement
$
42,271
42,271
Nonrecurring
Impaired loans
Foreclosed real estate
$
22,142
1,484
—
—
—
—
—
The following is a description of the valuation methodologies used for instruments measured at fair value.
—
—
—
—
—
22,142
1,484
Presold Mortgages in Process of Settlement - The fair value is based on the committed price that an
investor has agreed to pay for the loan and is considered a Level 1 input.
Securities Available for Sale — When quoted market prices are available in an active market, the securities
are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values
can be estimated by observing quoted prices of securities with similar characteristics, the securities are
classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities
are determined by our third-party bond accounting provider using matrix pricing. Matrix pricing is a
mathematical technique widely used in the industry to value debt securities without relying exclusively on
quoted prices for the specific securities but rather by relying on the securities’ relationship to other
benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities,
commercial mortgage-backed obligations, government-sponsored enterprise securities, and corporate
bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of
the hierarchy.
The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair
value determination is consistent with the applicable accounting guidance and that the investments are
properly classified in the fair value hierarchy.
Individually evaluated loans — Fair values for individually evaluated loans 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 generally determined by
third-party appraisers 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). Appraisals used in this analysis are generally obtained at least annually based on when the loans
first became impaired, and thus the appraisals are not necessarily as of the period ends presented. Any fair
value adjustments are recorded in the period incurred as provision for credit losses on the Consolidated
Statements of Income.
111
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). Appraisals used in this analysis are generally obtained at
least annually based on when the assets were acquired, and thus the appraisals are not necessarily as of
the period ends presented. 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 non-recurring basis as of December 31, 2021, the
significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Individually evaluated loans -
collateral-dependent
Fair Value at
December 31,
2021
Valuation
Technique
$
7,326 Appraised value
Individually evaluated loans - cash-
flow dependent
4,257 PV of expected
cash flows
Significant Unobservable
Inputs
Discounts applied for estimated
costs to sell
Discount rates used in the
calculation of PV of expected cash
flows
Range
(Weighted
Average)
10%
4% - 11%
(6.22%)
Foreclosed real estate
364 Appraised value
Discounts for estimated costs to
sell
10%
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2020, the
significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Impaired loans - valued at collateral
value
Impaired loans - valued at PV of
expected cash flows
Fair Value at
December 31,
2020
Valuation
Technique
Significant Unobservable
Inputs
$
16,000 Appraised value Discounts applied for estimated
6,142 PV of expected
cash flows
costs to sell
Discount rates used in the
calculation of PV of expected
cash flows
Range
(Weighted
Average)
10%
4% -11%
(6.21%)
Foreclosed real estate
1,484 Appraised value Discounts for estimated costs to
10%
sell
112
The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31,
2021 and 2020 are as follows:
($ in thousands)
Cash and due from banks, noninterest-bearing
Due from banks, interest-bearing
Securities held to maturity
Loans held for sale
Total loans, net of allowance
Accrued interest receivable
Bank-owned life insurance
SBA servicing asset
Deposits
Borrowings
Accrued interest payable
Level in
Fair Value
Hierarchy
Level 1
Level 1
Level 2
Level 2
Level 3
Level 1
Level 1
Level 3
Level 2
Level 2
Level 2
December 31, 2021
December 31, 2020
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
128,228
332,934
513,825
61,003
128,228
332,934
511,699
62,044
93,724
273,566
167,551
6,077
93,724
273,566
170,734
7,465
6,002,926
5,990,235
4,678,927
4,661,197
25,896
165,786
5,472
25,896
165,786
5,546
20,272
106,974
5,788
20,272
106,974
6,569
9,124,629
9,124,701
6,273,596
6,275,329
67,386
607
61,295
607
61,829
904
53,321
904
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly
liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include
net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense
accounts, income taxes currently payable, and other various accrued expenses. In addition, the income tax
ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Note 14. Stock-Based Compensation
The Company recorded total stock-based compensation expense of $2.3 million, $2.5 million, and $2.3 million for
the years ended December 31, 2021, 2020, and 2019, respectively. The Company recognized $0.5 million, $0.6
million, and $0.5 million of income tax benefits related to stock-based compensation expense in its income
statement for the years ended December 31, 2021, 2020, and 2019, respectively.
At December 31, 2021, the sole equity-based compensation plan for the Company is the First Bancorp 2014 Equity
Plan (the "Equity Plan"), which was approved by shareholders on May 8, 2014. As of December 31, 2021, the
Equity Plan had 445,231 shares remaining available for grant.
The 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 Plan's participants with those of the Company and its shareholders. The Equity Plan
allows for both grants of stock options and other types of equity-based compensation, including stock appreciation
rights, restricted and unrestricted stock, restricted performance stock, and performance units. For the last several
years, the only equity-based compensation granted by the Company has been shares of restricted stock, as it
relates to employees, and unrestricted stock as it relates to non-employee directors.
Recent restricted stock awards to employees typically include service-related vesting conditions only. Compensation
expense for these grants is recorded over the requisite service periods. Upon forfeiture, any previously recognized
compensation cost is reversed. Upon a change in control (as defined in the Equity Plan), unless the awards remain
outstanding or substitute equivalent awards are provided, the awards become immediately vested.
113
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 awards that will ultimately
vest. Over the past five years, there have been insignificant amounts of forfeitures, and therefore the Company
assumes that all awards granted with service conditions only will vest. The Company issues new shares of
common stock when options are exercised.
In addition to employee equity awards, the Company's practice is to grant unrestricted common shares, valued at
approximately $32,000, to each non-employee director (currently 13 in total) in June of each year. Compensation
expense associated with these director awards is recognized on the date of the award since there are no vesting
conditions. On June 1, 2021, the Company granted 7,050 shares of common stock to non-employee directors (705
shares per director), at a fair market value of $45.41 per share, which was the closing price of the Company’s
common stock on that date, which resulted in $0.3 million in expense. On June 1, 2020, the Company granted
14,146 shares of common stock to non-employee directors (1,286 shares per director), at a fair market value of
$24.87 per share, which was the closing price of the Company’s common stock on that date, which resulted in $0.4
million in expense. The expense associated with director grants is classified as "other operating expense" in the
Consolidated Statements of Income.
The following table presents information regarding the activity during 2019, 2020, and 2021 related to the
Company’s outstanding restricted stock:
Nonvested at January 1, 2019
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2019
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2020
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2021
Long-Term Restricted Stock
Shares
Grant Date
Fair Value
129,251 $
32.39
82,826
(51,757)
(954)
36.36
25.02
41.93
159,366 $
36.79
68,704
(55,965)
—
26.96
33.91
—
172,105 $
33.80
104,414
(63,369)
(6,819)
40.56
39.82
37.32
206,331 $
35.25
Total unrecognized compensation expense as of December 31, 2021 amounted to $4.3 million with a weighted
average remaining term of 2.4 years. The Company expects to record $2.0 million of compensation expense in the
next twelve months related to these nonvested awards that are outstanding at December 31, 2021.
Prior to 2010, stock options were the primary form of stock-based compensation utilized by the Company. At
December 31, 2019, 2020, and 2021, there were no stock options outstanding. In 2019, the Company received
$0.1 million as a result of stock option exercises, as 9,000 shares of stock options were exercised with a weighted
average exercise price of $14.35.
114
Note 15. Regulatory Restrictions
The Company is regulated by the Federal Reserve and is subject to securities registration and public reporting
regulations of the Securities and Exchange Commission. The Bank is regulated by the Federal Reserve 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, 2021, approximately $894.4 million of the Company’s investment in
the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
There was no average reserve balance requirement under the requirements of the Federal Reserve for the year
ended December 31, 2021.
The Company and the Bank must comply with regulatory capital requirements established by the FRB. Failure to
meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
The Company’s and the Bank’s respective regulatory capital ratios as of December 31, 2021 and 2020, along with
the minimum amounts required for capital adequacy purposes and to be well capitalized under prompt corrective
action in effect at such times are presented below. There are no conditions or events since year-end that
management believes have changed the Company’s or the Bank's classification.
115
($ in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
(must equal or exceed)
(must equal or exceed)
Actual
Fully Phased-In Regulatory
Guidelines Minimum
To Be Well Capitalized
Under Current Prompt
Corrective Action Provisions
As of December 31, 2021
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, 2020
Common Equity Tier I Capital Ratio
Company
Bank
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
$
888,936
12.53 % $
496,635
7.00 % $ N/A
N/A
934,687
13.18 %
496,285
7.00 %
460,836
6.50 %
1,040,964
14.67 %
744,953
10.50 %
N/A
N/A
1,023,354
14.43 %
744,427
10.50 %
708,979
10.00 %
952,272
934,687
952,272
934,687
13.42 %
603,057
8.50 %
N/A
N/A
13.18 %
602,632
8.50 %
567,183
8.00 %
9.39 %
405,790
4.00 %
N/A
N/A
9.22 %
405,652
4.00 %
507,065
5.00 %
$
639,369
13.19 % $
339,251
7.00 % $ N/A
N/A
682,312
14.08 %
339,125
7.00 %
314,902
6.50 %
744,835
735,282
691,865
682,312
691,865
682,312
15.37 %
508,876
10.50 %
N/A
N/A
15.18 %
508,688
10.50 %
484,465
10.00 %
14.28 %
411,947
8.50 %
N/A
N/A
14.08 %
411,795
8.50 %
387,572
8.00 %
9.88 %
280,039
4.00 %
N/A
N/A
9.75 %
280,003
4.00 %
350,004
5.00 %
Note 16. Supplementary Income Statement Information
Components of other noninterest income/expense exceeding 1% of total revenue for any of the years ended
December 31, 2021, 2020, and 2019 are as follows:
($ in thousands)
2021
2020
2019
Other service charges, commissions, and fees – interchange fees, net
$
18,480
14,142
13,814
Other operating expenses – software costs
Other operating expenses – data processing expense
Other operating expenses – credit card rewards expense
Other operating expenses – telephone and data line expense
5,133
3,619
3,431
3,026
5,035
2,904
2,391
2,893
4,326
2,787
1,903
3,057
116
Note 17. Condensed Parent Company Information
Condensed financial data for the Company (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
As of December 31,
2021
2020
$
18,625
1,279,285
7
5,056
15,284
938,294
7
(164)
1,302,973
953,421
65,412
6,986
72,398
54,200
5,800
60,000
1,230,575
893,421
Total liabilities and shareholders’ equity
$ 1,302,973
953,421
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31,
2021
2020
2019
Dividends from wholly-owned subsidiaries
$
25,300
Earnings of wholly-owned subsidiaries, net of dividends
Interest expense
All other income and (expenses), net
Net income
75,697
(1,455)
(3,898)
63,100
20,899
29,800
65,555
(1,743)
(2,648)
(779)
(661)
$
95,644
81,477
92,046
117
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
Operating Activities:
Net income
Equity in undistributed earnings of subsidiaries
Decrease (increase) in other assets
(Decrease) increase in other liabilities
Total – operating activities
Investing Activities:
Net cash received in acquisitions
Total - investing activities
Financing Activities:
Payment of common stock cash dividends
Repurchases of common stock
Proceeds from issuance of common stock
Stock withheld for payment of taxes
Total - financing activities
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Note 18. Shareholders’ Equity
Rabbi Trust Obligations
Year Ended December 31,
2021
2020
2019
$
95,644
(75,697)
3,924
(859)
81,477
(20,899)
5,806
92,046
(65,555)
(5,850)
(3)
64
23,012
66,381
20,705
7,379
7,379
—
—
—
—
(22,228)
(20,936)
(13,662)
(4,036)
(31,868)
(10,000)
—
—
(786)
(307)
129
(702)
(27,050)
(53,111)
(24,235)
3,341
15,284
$
18,625
13,270
2,014
15,284
(3,530)
5,544
2,014
With the acquisition of Carolina Bank in March 2017, the Company assumed a deferred compensation plan
structured as a Rabbi Trust for certain members of Carolina Bank’s board of directors that is fully funded by
Company common stock, which was valued at $7.7 million on the date of acquisition. Subsequent to this
acquisition, approximately $5.9 million of the deferred compensation has been paid to the plan participants. The
balances of the related asset and liability were each $1.8 million and $2.2 million at December 31, 2021 and
December 31, 2020, respectively, both of which are presented as components of shareholders’ equity.
In the acquisition of Select on October 15, 2021, the Company assumed a deferred compensation plan structured
as a Rabbi Trust for certain members of Select’s board of directors that is fully funded by Company common stock,
which was valued at $5.1 million on the date of acquisition. This plan was fully liquidated during the fourth quarter
of 2021 by distributing the shares to the participants.
Stock Repurchases
During 2021, the Company repurchased approximately 106,744 shares of the Company’s common stock at an
average price of $37.81, which totaled $4.0 million, under a $20 million repurchase authorization publicly
announced in November 2020, which expired on December 31, 2021. During 2020, the Company repurchased
approximately 1,117,208 shares of the Company’s common stock at an average price of $28.53, which totaled
$31.9 million, under a $40 million repurchase authorization publicly announced in November 2019. During 2019,
the Company repurchased approximately 282,000 shares of the Company’s common stock at an average price of
$35.51, which totaled $10 million, under a $25 million repurchase authorization publicly announced in February
2019. See Note 22 for disclosure of a share repurchase program authorized in 2022.
118
Note 19. Earnings Per Share
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings
Per Common Share ("EPS"):
2021
2020
2019
For Years Ended December 31,
($ in
thousands
except per
share
amounts)
Basic EPS:
Income
(Numer-
ator)
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
Shares
(Denom-
inator)
Per
Share
Amount
Income
(Numer-
ator)
Shares
(Denom-
inator)
Per
Share
Amount
Net income
$ 95,644
$ 81,477
$ 92,046
Less:
income
allocated to
participating
securities
Basic EPS
per common
share
Diluted EPS:
(483)
(398)
(450)
$ 95,161
29,876,151 $ 3.19 $ 81,079
28,839,866 $ 2.81 $ 91,596
29,547,851 $ 3.10
Net income
$ 95,644
29,876,151
$ 81,477
28,839,866
$ 92,046
29,547,851
Effect of
Dilutive
Securities
Diluted EPS
per common
share
—
151,634
—
141,701
—
172,648
$ 95,644
30,027,785 $ 3.19 $ 81,477
28,981,567 $ 2.81 $ 92,046
29,720,499 $ 3.10
For the years ended December 31, 2021, 2020, and 2019, there were no options that were anti-dilutive.
Note 20. Accumulated Other Comprehensive Income (Loss)
The components of AOCI for the Company are as follows:
($ in thousands)
December 31,
2021
December 31,
2020
December 31,
2019
Unrealized gain (loss) on securities available for sale
$
(32,067)
20,448
Deferred tax (liability) asset
Net unrealized gain (loss) on securities available for sale
7,369
(4,699)
(24,698)
15,749
Postretirement plans asset (liability)
Deferred tax asset (liability)
Net postretirement plans asset (liability)
(353)
(1,817)
81
418
(272)
(1,399)
9,743
(2,239)
7,504
(3,092)
711
(2,381)
Total accumulated other comprehensive income (loss)
$
(24,970)
14,350
5,123
119
The following table discloses the changes in AOCI for the years ended December 31, 2021, 2020, and 2019 (all
amounts are net of tax).
($ in thousands)
Unrealized
Gain
(Loss) on
Securities
Available for
Sale
Postretirement
Plans Asset
(Liability)
Total
Beginning balance at January 1, 2019
$
(9,494)
(2,467)
(11,961)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income (loss)
17,073
(75)
16,998
(528)
16,545
614
86
539
17,084
Ending balance at December 31, 2019
7,504
(2,381)
5,123
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income (loss)
14,425
(6,180)
8,245
454
528
982
14,879
(5,652)
9,227
Ending balance at at December 31, 2020
15,749
(1,399)
14,350
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income (loss)
(41,400)
953
671
456
(40,729)
1,409
(40,447)
1,127
(39,320)
Ending balance at December 31, 2021
$
(24,698)
(272)
(24,970)
Amounts reclassified from AOCI for Unrealized Gain (Loss) on Securities AFS represent realized securities gains or
losses, net of tax effects. Amounts reclassified from AOCI for Postretirement Plans Asset (Liability) represent
amortization of amounts included in AOCI, net of taxes, and are recorded in the "Other operating expenses" line
item of the Consolidated Statements of Income.
Note 21. 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, 2021, 2020, and 2019. Items outside the scope of
ASC 606 are noted as such.
120
($ in thousands)
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts
Other service charges, commissions, and fees:
Interchange income
Other fees
Commissions from sales of insurance and financial products:
Insurance income
Wealth management income
SBA consulting fees
Noninterest income (in-scope of Topic 606)
Noninterest income (out-of-scope of Topic 606)
Total noninterest income
For the Years Ended December 31,
2021
2020
2019
$
12,317
11,098
12,970
18,480
7,036
2,787
4,160
7,231
52,011
21,600
$
73,611
14,142
5,955
5,353
3,495
8,644
48,687
32,659
81,346
13,814
5,667
5,289
3,206
3,872
44,818
14,711
59,529
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 automated teller machine usage 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. Interchange fees are offset with interchange expenses and are presented on a net basis.
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
wealth management products and also earned commissions from the sale of insurance policies until the sale of First
Bank Insurance Services on June 30, 2021.
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.
Insurance income, which was earned by the Company until June 30, 2021, generally consisted of commissions from
the sale of insurance policies and performance-based commissions from insurance companies. The Company
recognized commission income from the sale of insurance policies when it acted as an agent between the
insurance company and the policyholder. The Company’s performance obligation was generally satisfied upon the
issuance of the insurance policy. Shortly after the policy was issued, the carrier remitted the commission payment to
the Company, and the Company recognized the revenue. Performance-based commissions from insurance
companies were recognized at a point in time as policies were sold. See Note 2 regarding the Company's sale of
First Bank Insurance Services, Inc.
121
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. During 2020, the Company's SBA subsidiary assisted its third-party
clients in the origination of PPP loans and charged and received fees for doing so. For several clients, the
forgiveness piece of the PPP process, which will occur at a future time, was included in the up-front fees charged.
Accordingly, the Company recorded deferred revenue for in these cases, which amounted to $1.6 million. During
2021 and 2020, the Company realized approximately $1.3 million and $0.2 million, respectively, of this deferred
revenue related to fulfilling a portion of the forgiveness services. At December 31, 2021, the remaining amount of
deferred revenue was $0.1 million. These fees will be recorded as income in the period in which the services
associated with the forgiveness process are rendered.
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.
Note 22. Subsequent Events
On February 7, 2022, the Company announced an increase in its quarterly dividend rate to $0.22 per share, from
the prior rate of $0.20 per share, and the authorization of a share repurchase program, pursuant to which the
Company may purchase shares of its common stock for an aggregate repurchase price not to exceed $40 million.
This program has an initial expiration date of December 31, 2022 and does not obligate the Company to purchase
any shares.
The Consolidated Balance Sheet at December 31, 2021 included $61.0 million in SBA and other loans held for sale.
Approximately $9.6 million of these loans were SBA loans that were sold in the ordinary course of business
subsequent to December 31, 2021. The remaining $51.4 million were comprised of Select loans that did not align
with the Company's strategy or were out-of-market and were thus designated for sale. Subsequent to December
31, 2021, these loans were sold at a price that approximated the December 31, 2021 carrying value.
122
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
First Bancorp
Southern Pines, North Carolina
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of First Bancorp (the “Company”) as of December
31, 2021 and 2020, 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, 2021, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and
2020, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have 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, 2021, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2022 expressed an unqualified
opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that: (1)
relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Allowance for Credit Losses
As described in Notes 1 and 4 to the Company's consolidated financial statements, the Company had a gross loan
portfolio of approximately $6.1 billion and related allowance for credit losses of approximately $78.8 million as of
December 31, 2021. The allowance for credit losses consists of quantitative and qualitative components. The
Company considers historical loss experience, current economic and business conditions, as well as reasonable
and supportable forecasts to develop the quantitative component. This quantitative component is then adjusted for
123
qualitative risk factors that involve significant estimates and subjective assumptions that require a high degree of
management’s judgment.
We identified management’s significant judgments and assumptions used in the determination of the qualitative
factors and the selection of the relevant macroeconomic forecasts to be used in the reasonable and supportable
forecast period of the allowance for credit losses as a critical audit matter. Auditing these complex judgments and
assumptions involved especially challenging auditor judgment due to the nature and extent of audit evidence and
effort required to address these matters, including the extent of specialized skill and knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
•
•
Testing the design and operating effectiveness of internal controls over management’s review of qualitative
factors, including controls related to the accuracy of data inputs used in the determination of adjustments
made to the qualitative factors, and
Assessing the reasonableness of management’s significant judgments and assumptions related to
evaluation of the loan portfolio and other qualitative factors for collectively evaluated loans.
Evaluating the relevance and reliability of data used in determining the qualitative factors by verifying the
data to internally developed and third-party sources, and other audit evidence gathered.
• Utilizing personnel with specialized skill and knowledge to assist with evaluating the reasonableness of the
macroeconomic forecasts used in the reasonable and supportable forecast period.
Acquisition of Select Bancorp, Inc.
As described in Note 2 to the Company’s consolidated financial statements, the Company completed its acquisition
of Select Bancorp, Inc. for a total purchase consideration of $325.8 million, with total assets acquired of $1.8 billion,
liabilities assumed of $1.6 billion and resulting goodwill of $132.4 million on October 15, 2021. Determination of the
acquisition date fair values of the assets acquired and liabilities assumed requires the Company to make significant
estimates and assumptions. The fair value determination of a loan portfolio requires greater levels of estimates and
assumptions than the remainder of purchased assets or assumed liabilities. In determining the fair values of loans,
the Company must determine projected credit losses and discount rates, among other assumptions.
We identified the determination of the projected credit loss and discount rate assumptions in the valuation of
acquired loans as a critical audit matter. Auditing these significant assumptions involved especially challenging and
subjective auditor judgement due to the nature and extent of audit effort required to address these matters,
including specialized skill and knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
Testing the completeness and accuracy of the loan level data utilized in the valuation of the acquisition date
fair value by (i) evaluating the reliability of data utilized in the valuation of loans and (ii) confirming certain
data with the borrower on a sample basis.
• Utilizing personnel with specialized skill and knowledge in valuation to assist with (i) assessing the
appropriateness of the valuation methodology and (ii) evaluating and testing the reasonableness of
projected credit loss and discount rate assumptions used in the valuation of the acquired loans. This
includes utilizing information obtained from market participants and recent market activity on other recent
acquisitions to test the Company’s assumptions and identify potential sources of contrary information.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2019.
Raleigh, North Carolina
March 1, 2022
124
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
First Bancorp
Southern Pines, North Carolina
Opinion on Internal Control over Financial Reporting
We have audited First Bancorp’s (the “Company’s”) internal control over financial reporting as of December 31,
2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,
based on the COSO criteria.
We also have 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, 2021 and 2020, 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, 2021, and the related notes and our report dated March 1, 2022
expressed an unqualified opinion thereon.
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, included in the accompanying Item
9A, 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 of internal control over financial reporting 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.
As indicated in the accompanying 9A, Management’s Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of Select Bancorp, Inc. and its subsidiary Select Bank & Trust Company (together,
“Select”), which was acquired on October 15, 2021, and which is included in the consolidated balance sheets of the
Company as of December 31, 2021, and the related consolidated statements of income, comprehensive income,
shareholders’ equity, and cash flows for the year then ended. Select constituted 17.5% and 25.4% of total assets
and total shareholders’ equity, respectively, as of December 31, 2021. Select contributed 4.4% of total revenues for
the year ended December 31, 2021 and contributed a net loss which equated to 12.8% of the total net income for
the year then ended. Management did not assess the effectiveness of internal control over financial reporting of
Select because of the timing of the acquisition which was completed on October 15, 2021. Our audit of internal
control over financial reporting of the Company also did not include an evaluation of the internal control over
financial reporting of Select.
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
125
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ BDO USA, LLP
Raleigh, North Carolina
March 1, 2022
126
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 GAAP.
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 GAAP and include, as necessary, best estimates and judgments by management.
Management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of Select Bancorp, Inc. and its subsidiary Select Bank & Trust Company (together,
“Select”), which was acquired on October 15, 2021, and which is included in the consolidated balance sheets of the
Company as of December 31, 2021, and the related consolidated statements of income, comprehensive income,
changes in total shareholders' equity, and cash flows for the year then ended. Select constituted 17.5% and 25.4%
of total assets and total shareholders' equity, respectively, as of December 31, 2021. Select contributed 4.4% of
total revenues for the year ended December 31, 2021, and contributed a net loss which equated to 12.8% of the
total net income for the year then ended. Management did not assess the effectiveness of internal control over
financial reporting of Select because of the timing of the acquisition which was completed on October 15, 2021.
Under the supervision and with the participation of management, including the principal executive officer and
principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013) (the "Framework"). Based on Management’s
evaluation under the 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, 2021.
BDO USA, LLP, an independent, registered public accounting firm, has audited the Company’s consolidated
financial statements as of and for the year ended December 31, 2021, and audited the Company’s effectiveness of
127
internal control over financial reporting as of December 31, 2021, as stated in their report, which is included in Item
8 hereof.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during, or subsequent to, the
fourth quarter of 2021 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, 2021, the Company had one equity-based compensation plan, under which new grants of equity-
based awards are possible.
The following table presents information as of December 31, 2021 regarding shares of the Company’s stock that
may be issued pursuant to the Company’s equity-based compensation plan. At December 31, 2021, the Company
had no options, warrants or rights outstanding under any compensation plans.
As of December 31, 2021
(a)
(b)
(c)
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))
— $
—
— $
—
—
—
445,231
—
445,231
Plan category
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
Total
_________________
(1) Consists of the Company’s 2014 Equity Plan, which is currently in effect.
128
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.
129
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 (*).
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.
2.a
2.b
2.c
2.d 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.
2.e Merger Agreement between First Bancorp and Select Bancorp, Inc. dated June 1, 2021 was filed as Exhibit
2.1 to the Company's Current Report on Form 8-K filed on June 1, 2021, and is incorporated herein by
reference.
3.a
3.b
4.a
4.b
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.
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.
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.
Description of the Company's securities registered pursuant to Section 12 of the Securities Exchange Act of
1934.
10.a Form of Indemnification Agreement between the Company and its Directors and Officers was filed as
Exhibit 10.a to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and is
incorporated herein by reference.
10.b First Bancorp Senior Management Supplemental Executive Retirement Plan was filed as Exhibit 10.b to the
Company's Annual Report on Form 10-K for the year ended December 31, 2018, and is incorporated herein
by reference. (*)
10.c First Bancorp 2007 Equity Plan was filed as Appendix B to the Registrant's Form Def 14A filed on March 27,
2007, and is incorporated herein by reference. (*)
10.d First Bancorp 2014 Equity Plan was filed as Appendix B to the Registrant’s Form Def 14A filed on April 4,
2014, and is incorporated herein by reference. (*)
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. (*)
130
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 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. (*)
10.i
10.j
First Bancorp Employees’ Pension Plan, including amendments, was filed as Exhibit 10.v to the Company's
Annual Report on Form 10-K for the year ended December 31, 2009, and is incorporated herein by
reference. (*)
Employment Agreement between the Company and Richard H. Moore dated August 28, 2012 was filed as
Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012,
and is incorporated herein by reference. Amendments to this agreement were filed in the Company’s
Current Reports on Form 8-K filed on March 9, 2017 and February 9, 2018 and are incorporated herein by
reference. (*)
10.k Amended and Restated Employment Agreement by and among the Company and the Bank and Michael G.
Mayer effective February 1, 2022 was filed as Exhibit 99.1 to the Company's Current Report on Form 8-K
filed on January 28, 2022 and is incorporated by reference. (*)
10.l
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. (*)
10.n 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. (*)
10.o 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. (*)
10.p 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. (*)
10.q The Company’s Annual Incentive Plan for certain employees and executive officers was filed as Exhibit 10.q
to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and is incorporated
herein by reference. (*)
10.r Employment Agreement by and among the Company and the Bank and G. Adams Currie Jr. dated
December 23, 2021 was filed as Exhibit 99.1 to the Company's Current Report on Form 8-K on December
23, 2021 and is incorporated by reference. (*)
10.s Employment Agreement by and among the Company and the Bank and Elizabeth B. Bostian dated
December 23, 2021 as filed as Exhibit 99.2 to the Company's Current Report on Form 8-K on December
23, 2021 and is incorporated by reference. (*)
List of Subsidiaries of Registrant
21
23.1 Consent of Independent Registered Public Accounting Firm, BDO USA, LLP
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.
131
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, 2021, 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, Chief Financial Officer,
300 SW Broad Street, Southern Pines, North Carolina, 28387.
Item 16. Form 10-K Summary
Not applicable.
132
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, 2022.
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.
133
Executive Officers
/s/ Richard H. Moore
Richard H. Moore
Chief Executive Officer &
Chairman of the Board
/s/ Elizabeth B. Bostian
Elizabeth B. Bostian
Executive Vice President & Chief
Financial Officer
/s/ Blaise B. Buczkowski
Blaise B. Buczkowski
Executive Vice President & Chief
Accounting Officer
March 1, 2022
March 1, 2022
March 1, 2022
Board of Directors
/s/ James C. Crawford, III
James C. Crawford, III
Lead Independent Director
Director
March 1, 2022
/s/ Daniel T. Blue, Jr.
Daniel T. Blue, Jr.
Director
March 1, 2022
/s/ Mary Clara Capel
Mary Clara Capel
Director
March 1, 2022
/s/ Suzanne DeFerie
Suzanne DeFerie
Director
March 1, 2022
/s/ Abby J. Donnelly
Abby J. Donnelly
Director
March 1, 2022
/s/ John B. Gould
John B. Gould
Director
March 1, 2022
/s/ Michael G. Mayer
Michael G. Mayer
Director
March 1, 2022
/s/ John W. McCauley
John W. McCauley
Director
March 1, 2022
/s/ Richard H. Moore
Richard H. Moore
Chairman of the Board
Director
March 1, 2022
/s/ Carlie C. McLamb, Jr.
Carlie C. McLamb, Jr.
Director
March 1, 2022
/s/ Dexter V. Perry
Dexter V. Perry
Director
March 1, 2022
/s/ O. Temple Sloan, III
O. Temple Sloan, III
Director
March 1, 2022
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
March 1, 2022
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
March 1, 2022
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
March 1, 2022
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