2022
Year IN Review
Richard H. Moore
Chief Executive Officer
Dear Shareholders,
Customers, and Friends,
This past year was one of growth
for First Bank as we announced
the acquisition of GrandSouth
Bancorporation, a bank based in
Greenville, South Carolina, in June
2022. GrandSouth was a bank we had
noticed for many years because of
their culture of excellence similar to our
own and attractive footprint in growing
markets. This purchase, which closed
on January 1, 2023, saw First Bank add
eight locations in South Carolina, and
ensures that we remain the premier
mid-sized community bank in the
Carolinas with branches now in every
major market in both states.
In addition to the eight branches, First
Bank also acquired a new division:
CarBucks Floor Plan. CarBucks allows
us to broaden the scope of our lending
capabilities and support local businesses,
largely used car sales, in an entirely
new way. The addition of GrandSouth’s
systems and team support will allow
for further profitable expansion in
the months and years ahead.
We also began the year with a big
announcement: in 2022 we committed
to giving away $500,000 in support
of educational initiatives throughout
the Carolinas. This was accomplished
through First Bank’s Project Launch
initiative, which included direct
donations to education-based
organizations, the awarding of monthly
grants (largely to teachers and
nonprofit leaders), the First Bank Book
Club (award-winning authors visiting
public elementary and middle schools
with free books), and the “Out Of This
World Educator Awards” (recognizing
excellent teachers with a ceremony and
a $5,000 gift). For more information
about these efforts, or if you’d like
to read about some of the incredible
projects that came to life from the
continued...
2022 Highlights
Over $500K in
donations through
Project Launch,
including 45
grant winners and
hundreds of schools
and nonprofits
supported
Out Of This World
Educator Awards in
October 2022
$30,422 total
donations through Power
of Good program
Triangle Business
Journal Corporate
Philanthropy Award
2022 Year In Review
Project Launch funds, visit
localfirstbank.com/projectlaunch.
Project Launch fell under the umbrella
of our corporate social responsibility
program that we launched in 2021, the
Power of Good. We maintained our
employee donation match program
and our Good Deeds week, both
of which remain popular with both
employees and community members.
It was thanks to all these efforts
that First Bank was among the 17
companies chosen out of 200 to receive
a 2022 Corporate Philanthropy Award
by the Triangle Business Journal.
The recent growth we experienced
organically and through acquisitions in
recent years allowed us to reach new
milestones with profitability in 2022.
We ended the year with
record-high annual net
income of $146.9 million
and earnings of $4.12 per
diluted common share.
Out of This World
Educator Awards
recognizing
excellent teachers
with a ceremony
and a $5,000 gift
We grew loans close by 10% and
last year and this one. Our commitment
improved our credit quality metrics
to Our Promise to Service Excellence,
over the course of the year, all while
with its core revolving around building
maintaining our commitment to
trusted relationships, has been our
the communities we serve and our
rallying cry and the crux of much of our
continued focus on our customers,
achievements. It’s our guiding star, and
shareholders, and each other. In fact,
we’ll continue to move forward as One
First Bancorp was recognized for its
Team. One Bank. One Promise.
financial performance in 2022, ranking
10th best in performance among
Here’s to another year of growth,
the largest US public banks.
giving, and excitement in 2023!
We are deeply grateful to the continued
Sincerely,
support of our customers, shareholders,
associates, and friends. It is because
of this, and the choices made by the
management team of your bank, that
we have been able to successfully
weather all of the shifting economic and
banking industry variables of both the
Richard H. Moore
Chief Executive Officer
S&P Global
First Bancorp named to top 10 of S&P Global
Top Public Banks 2022 for the second straight year
This past year was one of growth for First
Bank as we announced the acquisition of
GrandSouth Bancorporation, a bank based in
Greenville, South Carolina, in June 2022
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, 2022
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.
☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial
statements of the registrant included in the filing reflect the correction of an error to previously issued financial
statements. □
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of
incentive-based compensation received by any of the registrant's executive officers during the relevant recovery
period pursuant to §240.10D-1(b). □
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, 2022 as reported by The NASDAQ Global Select Market, was
approximately $1,222,172,000.
The number of shares of the registrant’s Common Stock outstanding on February 27, 2023 was 40,878,224.
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
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data:
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 2022
Consolidated Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2022
Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period
ended December 31, 2022
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2022
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
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
SIGNATURES
Page
4
5
18
27
27
27
28
28
29
30
54
58
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60
61
62
64
114
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Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 9C
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
*
Information called for by Part III (Items 10 through 14) is incorporated herein by reference to the Registrant’s
definitive Proxy Statement for the 2023 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 30, 2023.
3
MD&A and Financial Statement References
In this report: "2022 MD&A" and "2022 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, "2022 Financial Statements" and "2022 Financial Statements (Item 8)" generally refer to our Consolidated
Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, Consolidated
Statements of Changes in Equity, 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
AML
AOCI
Annual Report
or Report
ASC
ASC 326
ASC 350
Allowance for credit losses
Federal Reserve Board of Governors of the Federal Reserve System
Available for sale
The Anti-Money Laundering Act of 2020
FFCB
FHLB
Federal Farm Credit Bank
Federal Home Loan Bank
Accumulated Other Comprehensive Income/Loss
FHLMC
Federal Home Loan Mortgage Corporation
Annual Report on Form 10-K
FINCEN
Financial Crimes Enforcement Network
FASB Accounting Standards Codification
FASB ASC Topic 326, Financial Instruments –
Credit Losses
FASB ASC Topic 350, Intangibles - Goodwill and
Other
First Bank
Insurance
FNMA
GAAP
GDP
First Bank Insurance Services, Inc.
Federal National Mortgage Association
Accounting principles generally accepted in the
United States of America
Gross Domestic Product
Asheville
Savings
ASB Bancorp, Inc. and its subsidiary Asheville
Savings Bank SSB
ATM
Bank
Basel III
Automated teller machine
GNMA
Government National Mortgage Association
First Bank
Third Installment of the Basel Committee and
Banking System Accords
GrandSouth
GrandSouth Bancorp and its subsidiary GrandSouth
Bank
GSE
U.S. government-sponsored enterprise
BHC Act
Bank Holding Company Act of 1956, as amended
HTM
Held to maturity
Board
BOLI
BSA
Board of Directors of the Company or the Bank
Bank owned life insurance
Bank Secrecy Act
LIBOR
Magnolia
Financial
MD&A
CARES Act
Coronavirus Aid, Relief, and Economic Safety Act
NASDAQ
Carolina Bank Carolina Bank Holdings, Inc. and it subsidiary
NIM
Non-PCD
NPA(s)
NSF
OFAC
Patriot Act
PCD
PPP
SBA
CDARS
CECL
CEO
CET1
CFPB
Carolina Bank
Certificate of Deposit Account Registry Service
Current expected credit loss model
Chief Executive Officer
Common equity tier 1
Consumer Financial Protection Bureau
Commissioner North Carolina Commissioner of Banks
Company
CRA
DIF
Dodd-Frank
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
EPS
Earnings per share
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
FCA
FDIC
Financial Accounting Standards Board
Financial Conduct Authority
Federal Deposit Insurance Corporation
London Interbank Offered Rate
Magnolia Financial, Inc.
Management’s Discussion and Analysis of Results of
Operations and Financial Condition
National Association of Securities Dealers
Automated Quotations Stock Market’s Global
System
Net interest margin
Not Purchased Financial Assets with Credit
Deterioration
Nonperforming asset(s)
Nonsufficient funds
Treasury's Office of Foreign Asset Control
Uniting and Strengthening American by Providing
Appropriate Tools Required to Intercept and Obstruct
Terrorism
Purchased Financial Assets with Credit Deterioration
Paycheck Protection Program
United States Small Business Administration
SBA Complete
SEC
SBA Complete, Inc.
Securities and Exchange Commission
Select Bancorp, Inc. and its subsidiary Select Bank
& Trust Company
Tangible common equity
Troubled debt restructuring
United States Department of Treasury
First Bancorp and its consolidated subsidiaries
Select
TCE
TDR
Treasury
We/us/our
4
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Exchange Act 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, 2022,
the Company had total consolidated assets of $10.6 billion, total loans of $6.7 billion, total deposits of $9.2 billion,
and shareholders’ equity of $1.0 billion. Our principal activity is the ownership and operation of the Bank, a state-
chartered bank with its headquarters in Southern Pines, North Carolina, through which we engage in a full range of
banking activities. Our principal executive offices are located at 300 SW Broad St., Southern Pines, North Carolina
28387, and our telephone number is (910) 246-2500.
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 and in September 2013, the Company and the Bank moved their headquarters and main offices to Southern
Pines, North Carolina.
As of December 31 2022, 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 is a holding entity for certain foreclosed properties. During 2021,
the Bank sold substantially all of the assets of its insurance agency subsidiary, First Bank Insurance.
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. For purposes of the discussion below, these statutory
business trusts are not included in our consolidated financial statements as they are variable interest entities and
the Company is not the primary beneficiary. See additional discussion below in Item 7 under the section entitled
“Borrowings” and Note 1 to the consolidated financial statements.
Recent Developments and Acquisitions
On June 21, 2022, we announced an agreement to acquire GrandSouth Bancorporation ("GrandSouth"),
headquartered in Greenville, South Carolina, in an all-stock transaction. The terms of the agreement provided that
each share of GrandSouth common and preferred stock issued and outstanding immediately prior to the effective
time of the acquisition would be converted into 0.91 shares of the Company's common stock. The transaction
closed on January 1, 2023, adding eight branches throughout South Carolina and approximately $1.2 billion in total
assets, $1.0 billion in loans, and $1.1 billion in deposits to the Company's balance sheet as of the acquisition date.
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 region of South Carolina and in Virginia Beach, Virginia. We closed or consolidated
12 of Select's branches during 2022.
5
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. The
acquisition of Magnolia Financial 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 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.
In March 2017, we acquired Carolina Bank, a community bank headquartered in Greensboro, North Carolina 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.
Principal Business and Services We Provide
Lending Activities
We maintain a diversified loan portfolio by providing a broad range of commercial and retail lending services to
business entities and individuals. We provide commercial business loans, commercial and residential real estate
construction and mortgage loans, revolving lines of credit, letters of credit, and loans for personal uses, home
improvement, and automobiles. Commercial real estate loans include loans secured by owner-occupied
commercial buildings for office, storage, retail, and warehouse space. They also include non-owner occupied
commercial buildings such as leased retail and office space. We originate residential mortgages through our
Mortgage Banking Division, some of which we sell in the secondary market. Through Magnolia Financial we provide
accounts receivable financing and factoring, inventory financing, and purchase order financing. Through a network
of specialized Bank loan officers, our SBA Lending Division, and as supported by SBA Complete, we offer SBA
loans to small business owners across the nation. 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.
We generally do not buy loan participations or portions of national credits, but we may acquire balances subject to
participation agreements through acquisition. The total of loan participations purchased at December 31, 2022 was
nominal.
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. Because we operate primarily
within North Carolina and South Carolina, the economic conditions of these areas could have a material impact on
the Company. See additional discussion below in the section entitled “Market Area and Competition.”
Credit Administration and Lending Policies
Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the
Bank. We have sought to maintain a comprehensive lending policy that meets the credit needs of each of the
communities served by the Bank, including low- and moderate-income customers, and to employ lending
procedures and policies consistent with this approach. All loans are subject to our corporate loan policy and
financing guide, which are reviewed annually and updated as needed. Our lending policy requires, among other
things, an analysis of the borrower's projected cash flow and ability to service the debt.
Individual lending authority is assigned by the Bank’s Chief Credit Officer. Loans are approved under our written
loan policy, which provides that lending officers have sole authority to approve loans of various amounts
commensurate with their seniority, experience and needs within the market. All requests for extensions of credit in
excess of any individual lending officer's authority are reviewed by one of our regional credit officers, who can
approve loans up to their respective lending authorities which are generally between $5 million and $10 million.
When the request for approval exceeds the authority level of the regional credit officer, the request is then reviewed
for approval by the Bank’s Senior Credit Officer who has a lending authority of $20 million. For loans in excess of
this amount, each of the Bank’s President and Chief Credit Officer have individual authority to approve loans up to
$25 million, while the President and the Chief Credit Officer have joint authority to approve loans up to the in-house
limit of $75 million. The Board, generally through its Executive Loan Committee, approves loans in excess of the in-
house limit. In addition, the Executive Loan Committee reviews and approves loans to executive officers, directors,
and their affiliates.
6
Our legal lending limit to any one borrower is approximately $176.2 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 ownership
or other control relationship.
We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action.
Lending and credit administration officers and the Board meet periodically to review past due loans and portfolio
quality, the status of large loans and certain other credit or economic related matters which may impact the risk in
the portfolio. 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
loans, and in some cases we engage a third-party firm to assist in collection efforts. Loans that are serviced by
others, such as certain residential mortgage loans, are monitored by the Bank’s credit officers, although ultimate
collection of past due amounts is the responsibility of the servicing agents.
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 Board. The loan review department also provides training
assistance to the Bank’s training and credit administration departments.
To further assess the Bank’s loan portfolio, in addition to the Bank’s internal loan review department, we also
contract with an independent consulting firm to perform independent assessments, including reviewing new loan
originations meeting certain criteria and reviewing risk grades of existing credits meeting certain thresholds. The
consulting firm’s observations, comments, and risk grade recommendations, 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 ACL.
Loan Concentrations
Our commercial loan portfolio consists predominately of owner-occupied real estate and non-owner occupied
income-producing real estate and land development loans, which are primarily secured by real estate located in
North Carolina and South Carolina. We categorize these commercial loans by industry according to the North
American Industry Classification System (“NAICS”) to monitor the portfolio for possible concentrations in one or
more industries. As of December 31, 2022, we had loans outstanding in one such industry group classification that
exceeded 10% of total loans, with total loans of approximately $1.6 billion, or 23.4% of the portfolio, in the
classification "lessors of nonresidential buildings". These loans are generally secured by real estate and are
therefore susceptible to changes in real estate valuations and other market disruptions in this sector. The loans
were originated using underwriting standards as set forth by management. Our loan policies are focused on the risk
characteristics of the loan portfolio, including commercial real estate loans, in terms of loan approval and credit
quality. It is the opinion of management that these loans do not pose any unusual risks and that adequate
consideration has been given to the above loans in establishing the allowance for loan losses.
Most of our business activity is with customers located within the markets where we have banking operations. The
following table presents the total lending exposure for the counties with the largest percentage of our loan portfolio
as of December 31, 2022.
Wake County, North Carolina
New Hanover County, North Carolina
Mecklenburg County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
Percentage of Total
Loan Portfolio
11.6 %
9.1 %
7.9 %
6.1 %
5.0 %
No other markets had total loans outstanding in excess of 5% of the total portfolio at year end. There have been no
significant change in the the largest lending markets from the prior year. We have no concentrations of individual
borrowers. Therefore, while our exposure to credit risk is affected by changes in the economy within our markets,
the risk is not significantly concentrated.
7
Investment Activities
Our investment policy is 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
bonds, 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 may also invest in time deposits with other financial institutions up to a defined limit.
Investments in our portfolio must satisfy certain quality criteria. In making investment decisions, we do not solely
rely on credit ratings to determine the creditworthiness 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. Investments
must be “investment-grade” as determined by a nationally recognized investment rating service. Securities rated
below Moody’s BAA or Standard and Poor’s BBB generally will not be purchased. Securities rated below a single-A
rating are periodically reviewed for creditworthiness. We may purchase non-rated municipal bonds only if the issues
of bonds are located 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 periodic basis, we review the financial statements of the
issuers of the corporate bonds 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 Bank’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. 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 the Board. Once a quarter, our interest rate risk exposure is evaluated by the
Board. Each year, our written investment policy is reviewed by the Board and appropriate changes are made.
Deposits
We offer a full range of deposit accounts and services to both retail and commercial customers. These deposit
accounts have a variety of interest rates and terms and consist of interest-bearing and noninterest-bearing
accounts, including commercial and retail checking accounts, savings accounts, money market accounts, and time
deposits, including various types of certificates of deposits and individual retirement accounts. The Bank is a
member of the 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.
Brokered deposits are deposits obtained by utilizing an outside broker that is paid a fee. The Bank utilizes brokered
deposits to accomplish several purposes, such as acquiring a certain maturity and dollar amount without repricing
the deposits of the Bank’s current customers (which could increase or decrease the overall cost of deposit), and
acquiring certain maturities and dollar amounts to help manage interest rate risk.
Other Funding Sources
The FHLB allows us to obtain advances through its credit program. These advances are secured by securities
owned by the Bank and held in safekeeping by the FHLB, FHLB stock owned by the Bank and certain qualifying
loans secured by real estate, including residential mortgage loans, home equity lines of credit and commercial real
estate loans.
As additional sources of funding, we maintain credit arrangements with various other financial institutions to
purchase federal funds and participate in the Federal Reserve discount window borrowings program.
Other Services
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 and mobile check deposit, cash management, remote deposit capture, bank-by-phone
capabilities, and ATMs across our branch network.
8
We 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 FB Wealth Management Services, our
Investments Division.
Market Area and Competition
We are a community-oriented commercial bank offering a wide variety of financial services to meet the needs of the
communities we serve. As of December 31, 2022, we conducted business from 108 branches, with 101 branch
offices located across North Carolina and seven branches in South Carolina, primarily in the Pee Dee area.
Historically, our branches and facilities have been located in small- to medium-sized communities with economies
based primarily on a variety of industries, including services and manufacturing. In more recent years, through both
new branches and acquisitions, we have expanded in larger North Carolina cities, including Charlotte, Raleigh
(Triangle region), and Greensboro/Winston-Salem (Triad region). Our expansion into higher growth markets was
significantly enhanced by several strategic transactions discussed previously. Our most recent acquisition of
GrandSouth, headquartered in Greenville, South Carolina, has moved us into the desirable Upstate market of that
state as well as all its primary growth markets including Charleston and Columbia, South Carolina.
Our primary loan markets were previously presented in the Loan Concentrations section above. The following table
presents the the counties with the largest share of our deposit base as of December 31, 2022.
Moore County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
Percentage of Total
Deposits
10.9 %
8.3 %
6.0 %
No other market area comprise more than 5% of our deposit base at year end and there has been no significant
change in markets that hold the most significant share of our deposits from the prior year.
We experience strong competition in all aspects of the businesses in which we engage, including both making loans
and attracting deposits, from both bank and non-bank competitors. Broadly speaking, we compete with national
banks, super-regional banks, smaller community banks, credit unions, non-traditional internet-based banks and
insurance companies and agencies, and other financial intermediaries and investment alternatives, including
mortgage companies, credit card issuers, leasing companies, finance companies, money market mutual funds,
brokerage firms, governmental and corporate bond issuers, and other securities firms. Many of these non-bank
competitors are not subject to the same regulatory oversight, which can provide them a competitive advantage in
some instances, such as operational flexibility and lower cost structures. In many cases, our competitors have
substantially greater resources, including broader geographic markets, higher lending limits, and the ability to make
greater use of large-scale advertising and promotions, and offer certain services that we are unable to provide to
our customers. We attempt to compete successfully with our competitors, regardless of their size, by emphasizing
customer service, responsiveness, local decision making, and establishing relationships with our customers, while
continuing to provide a wide variety of services.
We encounter strong pricing competition in providing our services, particularly in making loans and attracting
deposits. Competition for deposits in our markets and for national brokered deposits is primarily based on the types
of deposits offered and rate paid on the deposits. Given the current rate environment, we have experienced
pressure to increase deposit rates in order to retain existing deposits and attract new deposits. Continued strong
competition also exists in all of the lending activities we emphasize. With banks of all sizes attempting to maximize
yields on earning assets and growth of their balance sheets, the competition for high-quality loans remains strong.
Accordingly, loan rates in our markets continue to be under competitive pressure.
We expect competition in the industry to continue to increase mainly as a result of the improvement in financial
technology used by both existing and new banking and financial services firms. Competition may further intensify as
additional companies (both banks and non-banks) enter the markets where we conduct business, competitors
combine to present more formidable challengers, and we enter mature markets consistent with our expansion
strategy.
9
Human Capital Resources
Our associates are one of our competitive advantages and continued investment in human capital is a top priority
for us. We have historically focused on building a rewarding work environment as we believe that valued and
engaged associates lead to satisfied and active customers, which contributes to enriched shareholder value. We
emphasize open and honest communication, collaboration, goal attainment, and personal and professional growth
as the foundation to delivering high-quality service to one another and our customers. As of December 31, 2022,
we had 1,244 full-time and 50 part-time associates, the majority of whom are employed by the Bank and are located
in North Carolina and South Carolina. We have associates with our subsidiaries in other states, primarily California.
None of these associates are represented by any collective bargaining agreements, and we consider our employee
relations to be good.
Our human capital management strategy focuses on attracting, developing and retaining 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 associates 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
team performance; and recognizing and respecting all of the characteristics and differences that make each of our
associates unique. Our workforce consists of approximately 73% females and 15% minorities. Of our officer
population, 61% are female and 8% are minorities, while our executive management team consists of 35% female
or minority executives.
In 2020, we formed a Diversity Council, which is chaired by our CEO and meets regularly. The Diversity Council is
focused on providing feedback and recommending actions for improvement, as well as removing 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.
Our Board and its Compensation Committee provide oversight on human capital matters, including overall
compensation philosophy, equity award programs, and succession planning. Our human resources and legal
departments develop policies to support and manage our human capital management strategy, identify risks, and
implement practices to mitigate those risks, under the oversight of the Board and its committees.
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
associates. Our culture is guided by a philosophy we call "Our Promise to Service Excellence" ("Our Promise"). The
principles of Our Promise are: Safety and Soundness, Knowledge and Accuracy, Courteous Service, and
Convenience and Ease. All associates joining the Company, including those joining as a result of an acquisition,
start their employment by participating in an orientation that focuses on learning about and embracing our culture.
We also seek to design careers with our Company that are fulfilling while fostering professional and personal growth
with continuing education, on-the-job training, and development programs. In 2020, we launched our Leadership
Development Program, which consists of three development tracks designed to instruct and enhance leadership
skills at various levels of an associate's management experience. We believe that effective and meaningful
leadership development will further elevate the Company and support us in continuing to attract and retain top talent
as well as create a succession plan for future growth. At the end of 2022, we had a total of 46 associates who have
completed one of the three leadership development tracks, of which 56% were female or minorities.
We host recruiting and internship programs that attract candidates from a variety of colleges and universities within
our footprint. These programs build a continuous talent pipeline and prioritize these individuals for internal openings.
Providing associates with meaningful, competitive and supportive benefits to care for their lives and families is a top
priority for the Company. We are proud to offer a comprehensive benefits package that includes medical, dental,
vision and life insurance, paid time-off, 401(k) profit-sharing plan participation and an employee stock purchase
10
plan. The Company’s 401(k) plan matches 100% of each employee’s elective deferral amount, up to the first 6% of
the contribution. To augment our health insurance plans, we offer EZaccessMD which provides free access to
medical professionals 24/7 for all associates and immediate family members living at their residence, regardless of
their participation in our health insurance program. EZaccessMD provides phone consultation with board certified
physicians and medical specialists, as well as a mobile health service that comes to an associate’s home to provide
diagnostic and treatment services as needed.
The Company’s benefits programs also include an Employee Assistance Program which provides all associates a
comprehensive and personalized process with a tailored approach to meet associates where they are and supports
them through issues they may be facing. The program provides unlimited phone access for information, resources,
and referrals and provides sessions with a counselor for the associate and their family members.
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.
Following the Company's acquisition of Select, our total assets 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.
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
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 are deemed activities closely related to the business of
banking or of managing or controlling banks under applicable law.
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 extends the
definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending and
borrowing transactions as covered transactions under applicable regulations. It also (1) expands the scope of
11
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 restrictions may limit
the Company’s ability to obtain funds from the Bank for its cash needs, including funds for 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 those subsidiaries.
State Law Restrictions. As a North Carolina corporation, the Company is subject to certain limitations and
restrictions under applicable North Carolina corporate laws. For example, those laws include 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 Laws. 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 laws.
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: (1) provide federal bank
regulatory agencies with powers to prevent unsafe and unsound banking practices; (2) restrict preferential loans by
banks to “insiders” of banks; (3) require banks to keep information on loans to major shareholders and executive
officers; and (4) 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, 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 those 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
12
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 an applicable financial
institution, federal bank regulators evaluate the record of those institutions in meeting the credit needs of local
communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of
the institution. 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 the filing of CRA protests 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 sets forth circumstances under which officers or directors of a bank may
be removed by the bank's federal supervisory agency, and 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
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, regulatory capital and liquidity. 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 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.
Inspections. The Federal Reserve conducts periodic inspections of bank holding companies, such as the Company.
In general, the objectives of this 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.
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, paying dividends
that deplete an institution's capital base to an inadequate level is typically deemed an unsafe and unsound banking
13
practice. In addition, a bank may not pay cash dividends that would reduce the amount of its capital to less than
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 expressing 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 its 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 and its related regulations 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. The SEC has adopted rules mandated by the Dodd-Frank Act that require a public
company to disclose the ratio of the compensation of its CEO to the median compensation of its employees and a
comparison of executive compensation to the market performance of the Company's stock. These rules are
intended to provide shareholders with information that they can use to evaluate executive compensation.
Consumer Financial Protection Bureau. The Dodd-Frank Act established the CFPB and empowered it to exercise
broad rule making, supervision, and enforcement authority for a wide range of consumer protection laws. The Bank
is subject to the direct supervision of the CFPB as its total assets exceed $10 billion. The CFPB focuses on (1) risks
to consumers and compliance with federal consumer financial laws; (2) the markets in which firms operate and risks
to consumers posed by activities in those markets; (3) depository institutions that offer a wide variety of consumer
financial products and services; and (4) non-depository companies that offer one or more consumer financial
products or services.
The CFPB's consumer financial laws apply to all banks and include, 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 (1) lack of financial savvy; (2) inability to protect himself in the
selection or use of consumer financial products or services; or (3) 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. Prior to December 31, 2021, the Bank qualified for the small issuer exemption from the Federal
Reserve’s interchange fees rules issued under the Durbin Amendment. As of December 31, 2021, the Bank
exceeded $10 billion in total consolidated assets, and as such, became subject to limitations of 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.
14
FDIC Insurance
As an FDIC insured depository institution, the Bank's deposits are insured up to applicable limits by the DIF which 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, and premiums are
determined based on its capital, supervisory ratings and other factors. Premium rates generally may increase if the
DIF is strained due to the cost of bank failures and the number of troubled banks. In addition, if a bank experiences
financial distress or operates in an unsafe or unsound manner, its deposit premiums may increase. The Dodd-
Frank Act made banks with $10 billion or more in total assets responsible for increasing the DIF reserve ratio from
1.15% to 1.35% if necessary. Accordingly, the Bank's premiums may increase from time to time if the FDIC needs to
increase assessments in order to replenish the fund and restore the DIF reserve ratio to 1.35%.
Legislative and Regulatory Guidance and Developments
Regulatory Capital Requirement under Basel III. The Company and the Bank are subject to the Basel III regulatory
capital rules that became 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 elements eligible for inclusion in Tier I capital, which for the Company includes its 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 ACL. 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 7.0%;
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 6.5%;
Tier I Capital Ratio of at least 8.0%;
Total Capital Ratio of at least 10.0%; and a
Leverage Ratio of at least 5.0%.
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
15
financial institutions not to share information about transactions and experiences with affiliated companies for the
purpose of marketing products or services.
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 rule making 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 addressed five categories of cyber standards:
(1) cyber risk governance; (2) cyber risk management; (3) internal dependency management; (4) external
dependency management; and (5) incident response, cyber resilience, and situational awareness. In May 2019, the
Federal Reserve announced that it would revisit the advance notice of proposed rule making in the future. In
December 2020, the federal banking agencies issued a notice of proposed rule making that would require banking
organizations to notify their primary regulators within 36 hours of becoming aware of a “computer-security incident”
or a “notification incident.” The notice 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, the risks of
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 used 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; sets
forth various recordkeeping and reporting requirements (such as reporting suspicious activities that might signal
criminal activity); and mandates certain due diligence procedures and "know your customer" documentation. 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, is intended to be a comprehensive reform and modernization to United States
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
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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.
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 May 2022, the Federal Reserve released an advanced notice of proposed rule making, seeking public comment
on ways to modernize the Federal Reserve’s CRA regulations. The advanced notice requests feedback on ways to
demonstrate how CRA activities qualify for consideration, to evaluate how banks meet the needs of low- and
moderate-income communities, and how 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 rule making 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 are not detrimental to the safety and soundness of such institutions by encouraging excessive risk-
taking. This guidance 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, and is based upon the key principles that a financial institution’s
incentive compensation arrangements should (1) provide incentives that do not encourage risk-taking beyond the
institution’s ability to effectively identify and manage risks; (2) be compatible with effective internal controls and risk
management; and (3) be supported by strong corporate governance, including active and effective oversight by the
financial institution’s board of directors.
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 2011 and issued a revised proposed rule in 2016
implementing requirements and prohibitions. The revised proposed rule would apply to all banks, among other
institutions, with at least $1 billion in average total consolidated assets, and would (1) prohibit certain types and
features of incentive-based compensation arrangements for senior executive officers; (2) require incentive-based
compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging
inappropriate risk; (3) require appropriate board or committee oversight; (4) establish minimum recordkeeping; and
(5) 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 the Company is subject to the reporting, information disclosure, proxy solicitation, insider trading limits and
other requirements imposed on public companies by the SEC under the Exchange Act. This includes limits on sales
of stock by certain insiders and the filing of insider ownership reports with the SEC. The SEC and NASDAQ have
adopted regulations under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act that apply to the Company as a
NASDAQ-traded, public company, which seek to improve corporate governance, provide enhanced penalties for
financial reporting improprieties and improve the reliability of disclosures in SEC filings.
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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
or operating in those states. Federal and state regulatory agencies governing the Company and the Bank 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, or otherwise adversely affect our operations and financial condition.
Available Information
We maintain a corporate internet site at www.LocalFirstBank.com, which contains a link within the “Investor
Relations” section of the site to each of our filings with the SEC, including our annual reports on Form 10-K, 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 Report.
Item 1A. Risk Factors
In addition to other information contained in this 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
We may fail to realize all of the anticipated benefits, including estimated cost savings, of our acquisition of
GrandSouth or other potential future acquisitions.
The success of our acquisition of GrandSouth, which was consummated on January 1, 2023, will depend on,
among other things, the ability to continue to successfully complete the integration of the two companies.
Developing successful synergy has demanded and will continue to demand, significant commitments of time,
energy and resources from our management and directors, which can be detrimental to the performance of their
other responsibilities. If we are unable to achieve the desired levels of integration and synergy, the anticipated
benefits of the acquisition may not be realized fully or at all, or may take longer than expected to be realized. There
is no guarantee that we will be able to successfully integrate the businesses of the Company and GrandSouth.
Combining the two companies may be more difficult, costly or time-consuming than expected and the
anticipated benefits and cost savings of the GrandSouth acquisition may not be realized.
The success of the GrandSouth acquisition, including anticipated benefits and cost savings, will depend, in part, on
the Company’s ability to successfully combine and integrate the businesses of the Company and GrandSouth in a
manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result
in decreased revenues due to loss of customers. Integration of an acquired business can be complex and costly,
including combining relevant accounting and data processing systems and management controls, as well as
managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts
could divert management attention and resources, which could adversely affect our financial condition and results of
operations.
It is possible that the integration process could result in the loss of key employees, the disruption of either
company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely
affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees
or to achieve the anticipated benefits and cost savings of the acquisition. The loss of key employees could
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adversely affect the Company’s ability to successfully conduct its business, which could have an adverse effect on
the Company’s financial results and the value of our common stock. As with any merger of financial institutions,
there also may be business disruptions that cause us to lose customers or cause customers to remove their
accounts and move their business to competing financial institutions.
The lingering economic impact of the COVID-19 pandemic combined with the current inflationary pressures
could adversely affect our financial condition and results of operations.
The COVID-19 pandemic caused significant economic disruption throughout the United States. Although the
economic activity has improved and there is growth in demand for goods and services, the lingering impact the
COVID-19 pandemic has created certain adverse and persistent macroeconomic consequences, including labor
shortages and disruptions of global supply chain, which may continue for some time and which have contributed to
rising inflationary pressures and the risk of recession.
As a result of the lingering impact of the COVID-19 pandemic and the related adverse economic consequences, we
could be subject to the following risks, among others, any of which individually or in combination with others could
have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
•
•
Demand for our products and services may decline, making it difficult to grow assets and income;
If we have high levels of unemployment for an extended period of time, loan delinquencies, problem assets,
and foreclosures may increase, resulting in increased charges and reduced income;
Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
Limitations may be placed on our ability to foreclose on properties we hold as collateral;
•
•
• Our ACL may have to be increased if borrowers experience financial difficulties which will adversely affect
•
our net income;
The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to
us;
• Our cybersecurity risks are increased if employees work remotely;
• We rely on third-party vendors for certain services and the unavailability of a critical service could have an
adverse effect on us; and
DIC premiums may increase if the FDIC experiences additional resolution costs.
•
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.
Inflation can have an adverse impact on our customers and their ability to repay.
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as
inflation decreases the value of money. Recently, there has been a pronounced rise in inflation and the Federal
Reserve has raised certain benchmark interest rates in an effort to combat this trend. Our customers may also be
affected by inflation and the rising costs of goods and services used in their households and businesses, which
could have a negative impact on their ability to repay their loans with us.
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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 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 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 ACL may not be adequate to cover actual losses.
CECL requires that credit deterioration is reflected in the income statement in the period of origination or acquisition
of a loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the
periods in which the expectation changes. CECL also requires significant management judgment that is supported
by models, assumptions, and data elements which may be subjective in nature or, as in the case of macroeconomic
forecasts, be volatile from period to period. This is expected to increase the complexity and associated risk,
particularly in times of economic uncertainty or other unforeseen circumstances, which could impact the Company's
results of operations and capital levels.
CECL 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
ACL, which could make the ACL more volatile.
Because of the extensive use of estimates and assumptions, our actual loan losses could differ, possibly
significantly, from our estimate and 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.
Recessionary conditions could result in increases in our level of nonperforming loans and/or reduce
demand for our products and services, which would lead to lower revenue, higher loan losses and lower
earnings.
Recessionary conditions and/or continued negative developments in the domestic and international credit markets
may significantly affect the markets in which we do business, the value of our loans and investments, and our
ongoing operations, costs and profitability. Declines in real estate values and sales volumes and increased
unemployment levels may result in higher than expected loan delinquencies, increases in our levels of
nonperforming and classified assets and a decline in demand for our products and services. These negative events
may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.
We are subject to extensive regulation, which could have an adverse effect on our operations.
The Bank is 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 DIF 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 ACL.
Changes in the regulations that apply to us, or changes in our compliance with regulations, could have a material
impact on our operations.
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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.
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, and in
particular during periods of rapid rate movements as experienced in 2022, 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,
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recession, unemployment trends, the Federal Reserve’s monetary policy, domestic and international disorder, and
instability in domestic and foreign financial markets.
Our financial instruments expose us to certain market risks, including changing interest rates, and may
increase the volatility of AOCI and total equity.
We hold certain financial instruments measured at fair value, primarily our AFS investments securities. For those
financial instruments measured at fair value, we are required to recognize the changes in the fair value of such
instruments in AOCI each quarter which impacts our total equity. Fair value can be affected by a variety of factors,
many of which are beyond our control, including our credit position, interest rate volatility, capital markets volatility,
and other economic factors. Accordingly, the application of fair value accounting for our AFS securities may cause
AOCI and total equity to be more volatile than would be suggested by our underlying performance.
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
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.
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.
Uncertainty relating to the LIBOR determination process and LIBOR discontinuance may adversely affect
our results of operations.
LIBOR is the reference rate used for certain transactions we are involved with, primarily our trust preferred
securities and approximately 3% of our loan portfolio which is tied to LIBOR-based rates. However, a reduced
volume of interbank unsecured term borrowing coupled with recent legal and regulatory proceedings related to rate
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manipulation by certain financial institutions has led to international reconsideration of LIBOR as a financial
benchmark. The United Kingdom FCA, which regulates the process for establishing LIBOR, announced in July 2017
that the sustainability of LIBOR could not be guaranteed. The administrator for LIBOR announced on March 5, 2021
that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and would cease to
publish the overnight, one-month, three-month, six-month and 12-month LIBOR settings on July 1, 2023.
Accordingly, the FCA has stated that is does not intend to persuade or compel banks to submit to LIBOR after July
1, 2023. Until such time, however, FCA panel banks have agreed to continue to support LIBOR.
The market transition away from LIBOR to an alternative reference rate is complex and could have a range of
negative effects on the Company’s business, financial condition, and results of operations. In particular, any such
transition could:
•
•
•
Adversely affect the interest rates paid on our trust preferred securities or received on our floating rate loans
tied to LIBOR rates;
Prompt inquiries or other actions from regulators in respect of the Company’s readiness and risk
management processes for the replacement of LIBOR with an alternative reference rate; and
Result in disputes, litigation or other actions with counterparties regarding the interpretation and
enforceability of certain fallback language in LIBOR-based securities.
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
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,
with a majority of our portfolio consisting of commercial and industrial loans and commercial loans secured by
commercial real estate. Future growth or acquisitions of banks with a portfolio composition different from ours could
cause our portfolio 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 customer sector, our results of operations and financial
condition may be adversely affected. Further, the deterioration of a 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.
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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:
•
•
•
•
•
•
the ability to develop, maintain, and build upon long-term customer relationships based on top quality
service, high ethical standards, and safe, sound assets;
the ability to expand our market position;
the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely
affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and
results of operations.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of technology increases efficiency and enables
financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our
ability to address the needs of our customers by using technology to provide products and services that will satisfy
customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services
to our customers. Failure to successfully keep pace with technological change affecting the financial services
industry could have a material adverse impact on our business and, in turn, our financial condition and results of
operations.
New lines of business or new products and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing lines
of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances
where the markets are not fully developed. 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.
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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
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.
25
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could have
a significant negative impact on our profitability.
Goodwill represents the amount of consideration exchanged over the fair value of net assets we acquired in the
purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if
events or changes in circumstances indicate the carrying value of the asset might be impaired. At December 31,
2022, our goodwill totaled $364.3 million. While we have recorded no impairment charges since we initially
recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of
impairment and related write-downs, which may have a material adverse effect on our 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.
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 comparatively
lower trading volume of our common stock relative to larger institutions, 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 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.
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
26
will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our
common stock.
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.
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.
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 building in Southern Pines, North Carolina that is
owned by the Bank. The building houses corporate, accounting, and administrative facilities. The Bank’s operational
departments, including accounting functions, information technology operations, loan operations, and deposit
operations, are primarily housed in buildings in Greensboro, North Carolina, Dunn, North Carolina, and Troy, North
Carolina, which are owned by the Bank. At December 31, 2022, the Company operated 108 bank branches. The
Company owned all of its bank branch premises except 16 branch offices for which the land and buildings are
leased and nine branch offices for which the land is leased but the building is owned. The Bank also leases several
other office locations for administrative functions and 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.
27
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and may be pending or threatened against
the Company and its subsidiaries. Neither the Company nor any of its subsidiaries is involved in any pending legal
proceedings that management believes are material to the Company or its consolidated financial position. If an
exposure were to be identified, it is the Company’s policy to establish and accrue appropriate reserves during the
accounting period in which a loss is deemed to be probable and the amount is determinable.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of
Equity Securities
Our common stock trades on 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 February 27, 2023, there were approximately 3,563 shareholders of record
and another approximately 17,497 shareholders whose stock is held in “street name.”
The tables in Item 7 also include information regarding cash dividends declared per share of common stock for the
periods presented. For each quarter in 2022, we declared a cash dividend of $0.22 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.
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the five-
year period commencing December 31, 2017 and ending December 31, 2022, with the cumulative total return of the
Russell 2000 Index (reflecting overall stock market performance of small-capitalization companies), and the S&P
U.S. BMI Banks Industry Group Index, as constructed by S & P Global (reflecting performance in broad market
banking industry stocks). The graph and table assume that $100 was invested on December 31, 2017 in each of
the Company’s common stock, the Russell 2000 Index, and the S&P U.S. BMI Banks Industry Group Index, and
that all dividends were reinvested.
28
First Bancorp Comparison of Five-Year Total Return Performances (1)
Five Years Ended December 31, 2022
Total Return Index Values (1)
December 31,
First Bancorp
Russell 2000 Index
$
100.00
100.00
(106.50)
(111.01)
115.93
111.70
101.19
134.00
139.29
153.85
133.49
122.41
2017
2018
2019
2020
2021
2022
S&P US BMI Banks Industry
Group Index
_____________
100.00
(116.46)
114.74
100.10
136.10
112.89
(1) Total return indices were provided from an independent source, S&P Global Market Intelligence, New York, New York, and assume initial
investment of $100 on December 31, 2017, reinvestment of dividends, and changes in market values. Total return index numerical values
used in this example are for illustrative purposes only.
Issuer Purchases of Equity Securities
Pursuant to authorizations by the Board, the Company from time to time has repurchased shares of common stock
in private transactions and in open-market purchases.
During 2022, the Company did not repurchase any shares of the Company's common stock. The $40.0 million
repurchase authorization in effect during 2022 expired December 31, 2022 and the Board has not adopted
additional repurchase authorizations.
Also see “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 12.
Item 6. Reserved.
29
Total Return First BancorpRussell 2000 IndexS&P US BMI Banks Industry Group Index12/31/201712/31/201812/31/201912/31/202012/31/202112/31/2022-150-100-50050100150 Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
This MD&A 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 2022 Highlights
The Company is a bank holding company headquartered in Southern Pines, North Carolina. We provide diversified
financial services primarily though the Bank, our principal subsidiary, including commercial and consumer banking
services, mortgage lending, SBA lending, accounts receivable financing, and investment advisory services. As of
December 31, 2022, the Bank had a 108 branch network in North Carolina and South Carolina and 1,244 full-time
equivalent employees. We have grown organically as well as through strategic acquisitions as discussed above in
"Recent Developments and Acquisitions".
2022 Financial Highlights:
•
Return on average assets was 1.39% for the year ended December 31, 2022, up from 1.13% for the prior
year. Return on average common equity of 13.40% was reported for the year ended December 31, 2022 as
compared to 9.86% for the prior year.
• Our total assets at December 31, 2022 were $10.6 billion, a 1.1% increase from a year earlier, with growth
in loans offset by reductions in other assets throughout the year.
•
•
•
Total loans outstanding increased $583.4 million, or 9.6%, during the year and total loans were in excess of
$6.6 billion at December 31, 2022.
Credit quality continues to be strong with the NPA to total assets ratio at 0.36% as of December 31, 2022
and as compared to 0.50% at December 31, 2021. Net charge offs as a percentage of average loans were
0.01% for 2022, down from 0.05% for the prior year.
Capital remains strong with a total CET1 ratio of 13.02%, up from 12.53% for the prior year, and total risk-
based capital ratio of 15.09% as of December 31, 2022 as compared to 14.67% for the prior year. Our TCE
ratio was 6.39% at December 31, 2022.
• We earned net income of $146.9 million, or $4.12 diluted EPS, during 2022 compared to net income of
$95.6 million, or $3.19 diluted EPS, in 2021. The main drivers to the increase in net income were as follows:
•
•
•
•
Net interest income increased $78.5 million, or 32%, driven by higher interest income, partially
offset by increased interest expense. Both of these increases were influences by higher market
interest rates during the year. The NIM on a tax-equivalent basis was 3.28% for 2022, an increase
of 12 basis points from 2021. The growth in average earning assets also contributed to the higher
interest income.
Interest income on loans increased $59.0 million related to a combination of higher volumes of
average balances and increased yields. Interest income on investment securities increased $23.4
million, also driven by higher average balances and higher yields.
The increase in interest expense of $6.6 million was driven by higher market rates resulting in some
repricing of our deposits. Also contributing was the utilization of higher cost brokered deposits and
short-term borrowings to fund loan demand and deposit fluctuations.
Provision for loans losses for 2022 of $12.6 million was up from the $9.6 million provision in 2021
due to in part to loan growth experienced during the year. Also contributing was the updated loss
rates and economic forecasts used in our CECL model which have indicated increasing risk of
economic deterioration, including higher unemployment rates and lower GDP projections, resulting
in a higher ACL. Refer to Provision for Loan Losses section below for further discussion.
30
•
•
•
Noninterest income declined $5.6 million, which resulted primarily from an $8.9 million decrease in
mortgage banking income related to lower levels of originations and sales activity. Also a factor
was the lower SBA-related revenues, including consulting fees and gains on sale, which was down
$6.9 million year-over-year as a result of lower PPP-related revenue in 2022, as well as the timing
and volume of loan originations available to be sold. Somewhat offsetting these declines in
revenue was higher service charges and other gains related to death benefits on BOLI policies.
Refer to Noninterest Income section below for further discussion.
Noninterest expense increased $10.6 million, primarily related to the Select acquisition completed
in the fourth quarter of 2021 driving higher operating expenses, including additional locations and
personnel, as well as the increased number of customer accounts and transaction volume creating
additional expense. Somewhat offsetting the higher expenses was a reduction of $11.8 million in
merger expenses year-over-year. Refer to Noninterest Expense section below for further
discussion.
Income tax expense was up $13.6 million relative to the higher pre-tax income. The effective tax
rate of 20.5% was fairly consistent with the prior year.
Current Economic Conditions and COVID-19 Impact
The lingering impact the COVID-19 pandemic continues to contribute to certain adverse and persistent
macroeconomic consequences, including labor shortages and disruptions of global supply chains. These issues,
coupled with the growth in economic activity and in the demand for goods and services, have resulted in rising
inflationary pressures and the risk of recession. As a result of the current uncertain economic conditions, we could
be subject to ongoing risks, which could have a material, adverse effect on our business, financial condition,
liquidity, and results of operations.
Our financial position and results of operations are 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 or securing our loans. We have not realized significant negative impact on our loan portfolio or asset
quality to date as a result of the pandemic impact. However, the economic pressures and uncertainties arising from
the recent expansion in economic activity, increased consumer demand and rising interest rates to combat inflation
have resulted in, and may continue to result in, specific changes in consumer and business spending and borrowing
habits, given the higher interest rate environment, which could making it difficult to grow assets and income.
The extent to which the current economic conditions and lingering impacts of COVID-19 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 actions taken by
governmental authorities response to inflationary trends and recessionary risks.
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 as well as business
combinations, related fair value measurements, and goodwill 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
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
31
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 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
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 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 on PCD assets is booked directly to the ACL.
Any subsequent changes in the ACL on PCD assets is recorded through the provision for loan losses.
We believe that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans as of
the balance sheet date. Actual losses incurred may differ materially from our estimates. For example, inflationary
pressures and recessionary concerns leading to macroeconomic economic deterioration, higher unemployment and
declines in real estate and other asset valuations could affect our loss experience and assumptions utilized in our
model.
Additional information on the loan portfolio and ACL can be found in the sections of this Item 7 titled “Nonperforming
Assets” and “Allowance for Credit Losses and Loan Loss Experience” below.
Business Combinations and Goodwill
Pursuant to applicable accounting guidance, we recognize assets acquired, including identified intangible assets,
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 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 represents 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
32
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.
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 on Loans 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
accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain
circumstances.
Similarly, premiums or discounts on acquired debt are accreted or 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 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. We believe that the accounting for goodwill also
involves a higher degree of judgment than most other significant accounting policies. ASC 350-10 establishes
standards for an impairment assessment of goodwill. At December 31, 2022, we had $364.3 million of goodwill.
At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment.
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 2022 there
were no triggers warranting interim impairment assessments and for the 2022 annual assessment, we concluded
that it was more likely than not that the fair value exceeded its carrying value.
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.”
33
RESULTS OF OPERATIONS
The following discussion reviews the results of operations and key drivers to change in the results of 2022 as
compared to 2021. For a description of our results of operations for 2021 as compared to 2020, refer to the
"Overview and 2021 Highlights," Results of Operations," and "Analysis of Financial Condition and Changes in
Financial Condition" sections of Item 7 in our 2021 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 $324.9 million in 2022, an increase of $78.5 million, or 31.8%, from the $246.4
million in 2021. The increase was due primarily to the increase in average earnings assets from both organic growth
and the Select acquisition completed in October 2021. For 2022, average interest-earning assets increased $2.1
billion, or 26.9%, including growth of $1.3 billion in average loans and $1.0 billion in average securities.
Also contributing to the higher net interest income was the expansion of our NIM which, on a tax-equivalent basis,
increased from 3.16% in 2021 to 3.28% in 2022. For internal purposes, we evaluate our NIM on a tax-equivalent
basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income then
dividing by total average earning assets. We believe that analysis of NIM on a tax-equivalent basis is useful and
appropriate because it allows a comparison of net interest in different periods without taking into account the
different mix of taxable versus non-taxable loans and investments that may have existed during those periods. The
following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting
NIM as reported and on a tax-equivalent basis.
($ 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,
2022
324,854
2,780
327,634
$
$
3.25 %
3.28 %
2021
246,395
2,243
248,638
3.13 %
3.16 %
2020
218,122
1,468
219,590
3.54 %
3.56 %
The increase in our NIM was driven by the rising market interest rates as the Federal Reserve's monetary policies
resulted in a 425 basis point rise in short-term rates between March and December 2022. As demonstrated in the
Average Balances and Net Interest Income Analysis table below, our total yield on average earning assets
increased 16 basis points while we were able to maintain a low total cost of funds. Our mix of earning assets
remained fairly stable between 2021 and 2022.
34
Our NIM for all periods benefited 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,
2022
2021
2020
Interest income – increased by accretion of loan discount on acquired loans
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
5,621
2,856
593
(254)
Impact on net interest income
$
8,816
6,107
2,707
295
(249)
8,860
3,817
2,511
100
(181)
6,247
The most significant component of the purchase accounting adjustments in each year was loan discount accretion
on purchased loans. Generally, the level of loan discount accretion will decline each year due to the natural
paydowns in acquired loan portfolios. Alternately, levels of accretion will increase as a result of acquisitions and
related additions to loan discounts on acquired portfolios which are accreted to income as experienced in 2021 with
the Select acquisition.
At December 31, 2022, 2021, and 2020, unaccreted loan discount on purchased loans amounted to $11.6 million,
$17.2 million, and $8.9 million, respectively. The Select acquired portfolio comprises the majority of the remaining
unaccreted loan discount at December 31, 2022.
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 fluctuate relative to the SBA loan portfolio balances. At December 31, 2022, 2021, and
2020, unaccreted loan discount on SBA loans amounted to $4.3 million, $6.0 million, and $7.3 million, respectively.
35
($ in thousands)
Assets
Loans (1) (2)
Taxable securities
Non-taxable securities
Other interest-earning
assets, primarily
overnight funds
Total interest-earning
assets
Cash and due from
banks
Premises and equipment
Other assets
Total assets
Liabilities and Equity
Interest-bearing checking
accounts
Money market accounts
Savings accounts
Total interest-bearing
deposits
Short-term borrowings
Long-term borrowings
Total interest-bearing
liabilities
Noninterest-bearing
checking accounts
The following table presented the major components of the net interest income and NIM.
Average Balances and Net Interest Income Analysis
2022
Avg.
Rate
Average
Volume
Year Ended December 31,
2021
Interest
Earned
or Paid
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2020
Avg.
Rate
Interest
Earned
or Paid
$ 6,293,280
3,059,683
296,803
4.42 % $ 278,027
53,536
1.75 %
4,387
1.48 %
5,018,391
2,204,713
162,878
4.36 %
1.45 %
1.49 %
219,013
32,076
2,402
4,702,743
967,900
34,108
4.53 %
2.11 %
2.13 %
213,099
20,429
725
339,419
1.48 %
5,007
485,337
0.50 %
2,427
455,349
0.75 %
3,431
9,989,185
3.41 %
340,957
7,871,319
3.25 %
255,918
6,160,100
3.86 %
237,684
104,374
135,160
327,511
$ 10,556,230
90,275
125,738
408,313
8,495,645
81,154
116,425
408,319
6,765,998
$ 1,545,573
2,515,897
739,681
0.08 % $
0.22 %
0.06 %
1,219
5,610
459
2,541
1,520
1,353,172
1,923,614
607,452
432,506
356,398
0.07 %
0.16 %
0.07 %
0.39 %
0.46 %
Other time deposits
Time deposits >$250,000
551,852
287,194
0.46 %
0.53 %
5,640,197
52,446
65,358
0.20 %
3.45 %
4.51 %
11,349
1,808
2,946
4,673,142
—
63,201
0.17 %
— %
2.60 %
919
3,158
443
1,722
1,639
7,881
—
1,642
1,019,773
1,367,851
467,682
500,424
355,737
0.12 %
0.34 %
0.15 %
1.49 %
0.64 %
3,711,467
71,955
114,490
0.44 %
1.42 %
1.96 %
1,208
4,632
711
7,473
2,277
16,301
1,022
2,239
5,758,001
0.28 %
16,103
4,736,343
0.13 %
9,523
3,897,912
0.50 %
19,562
3,643,308
2,728,768
1,932,823
Total sources of funds
9,401,309
0.17 %
7,465,111
0.13 %
5,830,735
0.34 %
Other liabilities
58,008
Shareholders’ equity
1,096,913
Total liabilities and
shareholders’ equity
$ 10,556,230
60,759
969,775
8,495,645
60,731
874,532
6,765,998
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
3.25 % $ 324,854
3.13 %
246,395
3.54 %
218,122
3.28 % $ 327,634
3.29 %
4.86 %
248,638
3.16 %
3.14 %
3.25 %
219,590
3.56 %
3.36 %
3.54 %
(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 $3.1 million, $9.7 million, and $4.8 million for 2022, 2021, and
2020, respectively.
Includes accretion of discount on acquired and SBA loans of $8.5 million, $8.8 million, and $6.3 million in 2022, 2021, and 2020, respectively.
Includes tax-equivalent adjustments of $2.8 million, $2.2 million and $1.5 million in 2022, 2021, and 2020, respectively, to reflect the federal and state tax
benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due
to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest
expense.
36
The following table presents additional detail regarding the estimated impact that changes in loan and deposit
volumes and changes in the interest rates we earned/paid had on our net interest income in 2022 and 2021.
Volume and Rate Variance Analysis
($ 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
Other time
Time deposits >$250,000
Total interest-bearing
deposits
Short-term borrowings
Long-term borrowings
Total interest expense
Year Ended December 31, 2022
Year Ended December 31, 2021
Change Attributable to
Change Attributable to
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$
55,980
13,681
2,002
(1,442)
70,221
142
1,147
89
360
(340)
1,398
904
76
2,378
3,034
7,779
(17)
4,022
14,818
158
1,305
(73)
459
221
2,070
904
1,228
4,202
59,014
21,460
1,985
2,580
85,039
300
2,452
16
819
(119)
3,468
1,808
1,304
6,580
14,040
22,055
2,316
188
38,599
311
1,399
158
(857)
(2)
1,009
(1,022)
(1,167)
(1,180)
(8,126)
(10,408)
(639)
(1,192)
(20,365)
(600)
(2,873)
(426)
(4,894)
(636)
(9,429)
—
570
5,914
11,647
1,677
(1,004)
18,234
(289)
(1,474)
(268)
(5,751)
(638)
(8,420)
(1,022)
(597)
(8,859)
(10,039)
Net interest income
$
67,843
10,616
78,459
39,779
(11,506)
28,273
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 $78.5 million in 2022. Higher earning asset
volumes were the primary driver of the increase in income. In addition, market rate increases were a contributing
factor as the Federal Reserve raised short-term rates 425 basis points during the year. The Federal Reserve has
continued to increase short-term interest rates into 2023 as they implement monetary policy in an effort to combat
inflation.
•
•
•
•
For 2022, higher loan volume was the primary contributor to increased interest income, driving $56.0 million
of the increase. Higher market rates contributed to an additional $3.0 million of loan interest income.
Variable rate loans comprise approximately 20% of the loan portfolio, accordingly, we are limited as to the
magnitude of the impact we experience from each rate increase.
Increases in both volume of average investment securities and yields on the portfolio resulted in additional
interest income of $23.4 million in 2022.
Average balances of other interest-earning assets (primarily overnight funds and presold mortgages held for
sale) declined in 2022 and resulted in a $1.4 million decrease in interest income. The impact of lower
volumes was more than offset by the increase in market rates contributing $4.0 million in additional interest
income for the year.
The increase of $3.5 million in interest expense on deposits was a combination of higher volumes, primarily
in money market deposit accounts and other time deposits, and higher rates on accounts as as we have
begun to experience some pressure to reprice deposits given the increase in market rates.
37
•
Higher levels of borrowings, primarily in short-term FHLB advances to fund loan demand and deposit
fluctuations, resulted in an increase in borrowings interest expense of $1.0 million in 2022. The more
significant contributor to the increase in interest expense was the repricing of our variable rate trust
preferred securities and the higher cost of short-term advances, which added $2.1 million to interest
expense for the year.
Provision for Loan Losses and Provision for Unfunded Commitments
We implemented CECL effective January 1, 2021. Prior to that, the provision for loan losses was based on the
incurred loss impairment framework for loan losses under ASC 310-30 which 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 $12.6 million in 2022 and $9.6 million in 2021. 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 CECL model. The increase in the provision for the year ended December 31, 2022 as compared to the
prior year was a combination of loan growth during the year, which increased $583.4 million, and updated economic
forecasts and loss driver inputs to the CECL model. We subscribe to a third-party service which provides a
quarterly macroeconomic scenarios for the United States economy. For 2022, we utilized the baseline forecast,
which incorporates an equal probability of the United States economy performing better or worse than the
projection. The economic forecasts throughout the year have projected general weakening of the economy
demonstrated in higher projected unemployment rates, lower GDP, and declining price indices for both commercial
real estate and residential mortgages. These worsening economic projections translated to higher forecasted
losses in our loan portfolio and a higher estimated ACL.
Also under the CECL method, in 2022 we recorded a reduction in the provision for unfunded commitments of $0.2
million compared to $5.4 million in provision for unfunded commitments for 2021. Changes in the level of provision
each year are generally related to fluctuations in the level of available credit lines and updated loss drivers.
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.
Noninterest Income
Our noninterest income amounted to $68.0 million in 2022, $73.6 million in 2021, and $81.3 million in 2020.
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 $60.6 million in 2022, $73.2 million in 2021, and $73.4 million in
2020.
38
Noninterest Income
($ in thousands)
Service charges on deposit accounts
Other service charges, commissions and fees - interchange income, net
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 (losses) gains, net
Other gains (losses), net
Noninterest income
Non-GAAP adjustments - Exclude:
Securities losses (gains), net
Other (gains) losses, net
Adjusted noninterest income
Year Ended December 31,
2022
2021
2020
$
15,523
14,996
11,298
2,102
5,195
2,608
5,076
3,847
—
7,340
67,985
—
(7,340)
$
60,645
12,317
18,480
7,036
10,975
6,947
7,231
7,329
2,885
(1,237)
1,648
73,611
1,237
(1,648)
73,200
11,098
14,142
5,955
14,183
8,848
8,644
7,973
2,533
8,024
(54)
81,346
(8,024)
54
73,376
Service charges on deposit accounts increased $3.2 million, or 26.0%, in 2022 as compared to 2021. The increase
in 2022 was primarily due to growth in the number of checking accounts generating fees, as well as higher NSF
activity during the year. In addition to the organic growth we experienced during the year, the acquisition of Select
deposit accounts in the fourth quarter of 2021 contributed to the higher service charge income during 2022.
Total "Other service charges, commissions and fees - interchange income,net" from bankcard activity amounted to
$15.0 million in 2022, a 18.9% decrease from the $18.5 million in 2021. While the number of cards outstanding and
volume of transactions continues to grow, we became subject to the Durbin Amendment limitations on interchange
fees effective July 1, 2022. The decrease in revenue is a direct result of the lower interchange fee per transaction
for the last six months of the year. We anticipate lower levels of interchange revenue going forward as we will
continue to be subject to the Durbin Amendment limitations.
"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 increase in this item in 2022 of $4.3 million, or 60.6%, was 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 $2.1 million in 2022, a decline of $8.9 million or 80.8% from 2021.
Mortgage loan refinancing and origination volumes declined significantly during the year due primarily to the rapid
increases in mortgage interest rates. Lower originations, combined with a higher percentage of mortgages retained
in the portfolio during 2022 as compared to the prior year, resulted in the lower revenue from mortgage loan sales.
We anticipate lower revenue from sales of mortgage loans as long as the higher interest rate environment continues
and originations are slower.
Commissions from sales of insurance and financial products amounted to $5.2 million in 2022, down $1.8 million
from 2021. The decrease is due to the sale of the majority of the assets of First Bank Insurance in June 2021.
The reduction in SBA consulting services in 2022 of $4.6 million, or 63.9%, is primarily related to the wind-down of
the PPP loan program. SBA Complete recognized $3.2 million in PPP fees during 2021 as compared to $355,000
in 2022.
SBA loan sale gains declined $2.3 million in 2022 related in part to lower loan originations in the current year as
compared to 2021. Also contributing to the lower fees was the expiration of the 90% SBA guarantee level effective
during 2021 as a part of the CARES Act, which resulted in a lower portion of each loan being available to be sold in
2022.
39
The 33.3% increase in BOLI income in 2022 was related to the acquisition of Select in the fourth quarter of 2021
which had $31.1 million in BOLI assets as of the date of acquisition.
“Other gains (losses), net” amounted to a net gain of $7.3 million for 2022 related primarily to death benefits realized
on BOLI. The 2021 gain was related to the sale of First Bank Insurance during that year.
Noninterest Expenses
Total noninterest expenses totaled $195.2 million, $184.7 million, and $161.3 million, for 2022, 2021, and 2020,
respectively.
Noninterest Expenses
($ in thousands)
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Merger and acquisition expenses
Amortization of intangible assets
Bankcard expenses
Telephone and data lines
Software licenses and other software costs
Data processing expense
Professional fees
Advertising and marketing
Corporate and FDIC insurance costs
Non-credit losses
Other operating expenses
Total
Year Ended December 31,
2022
2021
2020
$
96,321
21,397
117,718
12,796
5,808
5,072
3,684
1,653
3,631
6,064
7,535
4,350
3,032
4,858
2,721
86,815
16,434
84,941
16,027
103,249
100,968
11,528
4,492
16,845
3,531
4,609
3,087
5,316
5,959
2,992
2,580
3,986
1,136
11,278
4,285
—
3,956
3,599
2,893
5,150
4,743
2,794
2,297
3,136
1,024
16,298
$
195,220
15,346
184,656
15,175
161,298
In general, between 2021 and 2022, the 5.7% increase in total noninterest expenses, as well as the increases in
most of the individual expense line items in the above table, was driven by higher operating expense from additional
personnel and locations, as well as increases in the number of customer accounts and transactions resulting from
the Select acquisition which occurred in the fourth quarter of 2021. We anticipate increases in operating expenses
as we continue to grow organically and through acquisitions. The more notable variances in expense categories for
2022 follows.
Total personnel expense increased $14.5 million, or 14.0% in 2022, as compared to the prior year. Within personnel
expense, salaries expense increased $9.5 million, or 10.9%, and benefits increased $5.0 million or 30.2%, driven by
the addition of full time associates, combined with the increase in employee insurance costs related to higher claims
paid under our self-insured health insurance plan.
Merger and acquisition expenses were down $11.8 million in 2022 as compared to the prior year. 2022 merger
expenses were related to the GrandSouth acquisition and were comprised primarily of investment banking fees and
other professional fees, and conversion services. The 2021 expenses were related to the Select acquisition and
were comprised primarily of investment banking fees and other professional fees, severance costs, contract
termination fees, and data processing conversion expenses.
Income Taxes
We recorded income tax expense of $38.3 million in 2022, $24.7 million in 2021, and $21.7 million in 2020. Our
effective tax rates were fairly stable at 20.7% for 2022, 20.5% for 2021, and 21.0% for 2020. We expect our
effective tax rate to be approximately 21.0% in 2023.
40
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 $6.7 billion at December 31, 2022, an increase of $583.4 million, or 9.6%, from
December 31, 2021. Net loan growth for the year was all organic growth as there were no acquisitions in 2022.
The following table provides a summary of the loan portfolio composition at each of the past five year ends.
Loan Portfolio Composition
2022
2021
2020
2019
2018
As of December 31,
($ in thousands)
Amount
% of
Total
Loans
% of
Total
Loans
% of
Total
Loans
Amount
Amount
% of
Total
Loans
% of
Total
Loans
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 (fees) costs
$ 641,941
9 %
648,997
11 %
782,549
17 %
504,271
11 %
457,037
11 %
934,176
14 %
828,549
13 %
570,672
12 %
530,866
12 %
518,976
12 %
1,195,785
18 % 1,021,966
17 %
972,378
21 % 1,105,014
25 % 1,054,176
25 %
323,726
5 %
331,932
5 %
306,256
6 %
337,922
8 %
359,162
8 %
3,510,261
53 % 3,194,737
53 % 2,049,203
43 % 1,917,280
43 % 1,787,022
60,659
1 %
57,238
1 %
53,955
1 %
56,172
1 %
71,392
42 %
2 %
6,666,548
100 % 6,083,419
100 % 4,735,013
100 % 4,451,525
100 % 4,247,765
100 %
(1,403)
(1,704)
(3,698)
1,941
1,299
Total loans
$ 6,665,145
6,081,715
4,731,315
4,453,466
4,249,064
The majority of our loan portfolio over the years has been real estate mortgage loans, including commercial and
residential mortgages. All loan categories secured by real estate, including construction and land loans, have
historically ranged from approximately 85% to 90% of the loan portfolio. 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.
The largest component of our portfolio, commercial real estate loans, remained unchanged at 53% of the total
portfolio at December 31, 2022 as compared to the prior year. Residential real estate loans remained the second
largest component at 18% of total loans at December 31, 2022. This percentage is fairly stable with the prior year,
but has declined somewhat over the last several years related to the increase in consumers refinancing their home
loans and the Bank selling more residential loans in the secondary market prior to 2022.
Commercial, financial, and agricultural loans comprised 9% of total loans at December 31, 2022, down somewhat
from the prior year end, but was in line with the historical level for this category. The higher percentage for this
category in 2020 was related to PPP loans made under the provisions of the CARES Act, which were forgiven in
accordance with the PPP loan provisions from late 2020 through early 2022.
41
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.
Loan Maturities
As of December 31, 2022
($ 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
$ 89,720
7.38 %
42,777
7.32 %
40,309
8.44 %
306
9.15 %
173,112
7.64 %
190,224
8.14 %
89,360
7.63 %
59,875
6.91 %
9,131
7.98 %
348,590
7.79 %
5,231
8.05 %
11,467
7.73 %
20,057
5.26 %
175,052
3.90 %
211,807
4.23 %
21,627
7.56 %
24,604
7.83 %
266,472
7.60 %
—
— %
312,703
7.62 %
72,561
7.58 %
76,090
7.28 %
48,862
6.47 %
88,538
7.25 %
286,051
7.21 %
Consumer loans
8,040
8.26 %
3,739
8.79 %
22
7.00 %
905
9.91 %
12,706
8.65 %
Total at variable rates
387,403
7.83 %
248,037
7.51 %
435,597
7.35 %
273,932
5.17 %
1,344,969
7.06 %
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
18,471
4.17 %
181,272
4.17 %
166,945
3.26 %
92,701
2.64 %
459,389
3.50 %
196,924
3.78 %
157,603
4.36 %
229,851
3.74 %
198
4.50 %
584,576
3.92 %
31,458
4.94 %
217,009
4.49 %
171,560
4.00 %
559,123
3.63 %
979,150
3.91 %
981
6.20 %
3,688
5.12 %
4,753
4.99 %
205
6.45 %
9,627
5.19 %
136,176
4.64 %
1,364,263
4.13 %
1,707,373
3.64 %
3,250
3.92 %
3,211,062
3.89 %
Consumer loans
15,807
5.94 %
23,079
6.25 %
6,582
6.13 %
2,390 16.82 %
47,858
6.97 %
Total at fixed rates
399,817
4.27 %
1,946,914
4.22 %
2,287,064
3.66 %
657,867
3.54 %
5,291,662
3.89 %
Subtotal
Nonaccrual loans
Total loans
787,220
6.02 %
2,194,951
4.59 %
2,722,661
4.25 %
931,799
4.02 %
6,636,631
4.53 %
28,514
$ 815,734
—
2,194,951
—
2,722,661
—
931,799
28,514
6,665,145
Note: The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
Approximately 12% of our accruing loans outstanding at December 31, 2022 mature within one year and 45% of
total loans mature within five years. As of December 31, 2022, the percentages of variable rate loans and fixed rate
loans as compared to total performing loans were 20% and 80%, respectively. In recent years, the mix of variable
rate loans to fixed rate loans has been shifting to more fixed rate loans given the low interest rate environment prior
to 2022 and borrowers' preference to lock in low rates. While fixed rate loans present risk to our Company, in
particular in rising interest rate environment as we have experienced in 2022, we measure our interest rate risk
closely. Refer to additional discussion in the section “Interest Rate Risk” below.
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.
42
Additionally, there are industry practices that could subject the Company to increased credit risk should economic
conditions change over the course of a loan’s life. For example, the Bank makes variable rate loans and fixed rate
principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans
are underwritten and monitored to manage the associated risks. The Company has determined that there is no
concentration of credit risk associated with its lending policies or practices.
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 90% 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 (1) interest accrued but unpaid as of the date a loan is placed on nonaccrual
status is reversed and deducted from interest income; (2) future accruals of interest income are not recognized until
it becomes probable that both principal and interest will be paid; and (3) 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
Total Loans
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
2022
2021
As of December 31,
2020
2019
2018
28,514
9,121
—
37,635
658
38,293
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
90,967
6,665,145
78,789
6,081,715
52,388
4,731,315
21,398
4,453,466
21,039
4,249,064
$
$
$
0.43 %
0.56 %
0.57 %
0.36 %
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 %
319.03 %
227.08 %
149.36 %
86.05 %
93.20 %
As a matter of policy, we generally place all loans that are past due 90 or more days on nonaccrual basis. There
were no accruing loans that are past due 90 or more days at December 31, 2022. At December 31, 2021, there
were $1.0 million in this category related to two loans acquired from Select, one of which was renewed and the
other of which was placed on nonaccrual in January 2022.
We continue to see improving trends in asset quality. Our total nonperforming loans to total loans declined 26 basis
points to 0.56% at December 31, 2022, while our total NPA ratio decreased 14 basis points to 0.36% at
December 31, 2022. The increase in NPAs in 2021 was a direct result of the Select acquisition, combined with the
lingering impact of the Covid-19 pandemic. Additional discussion of the credit quality classification status of our
loans is contained in Note 4 to our consolidated financial statements.
43
As of December 31, 2022, SBA loans accounted for approximately $14.6 million of our nonaccrual loans, or 9.5%, of
the total SBA portfolio, and carried guarantees from the SBA totaling $5.8 million. This is compared to $16.8 million,
or 9.8%, of the non-PPP SBA portfolio at December 31, 2021. 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 our 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 $7.8 million million to total $8.2 million at December 31, 2022.
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 $39.0 million and $43.1 million
as of December 31, 2022 and 2021, respectively. In addition, loans that are in the risk category of "classified" which
are still accruing interest totaled $20.0 million at December 31, 2022 and $21.3 million at December 31, 2021.
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 $0.7 million
at December 31, 2022, down from $3.1 million in 2021. The decrease is related to the sale of properties in 2022 as
we continue to see active real estate markets and steady sales activity. Only one property was added to foreclosed
real estate during 2022 while we completed the sale of six properties during the year.
Allowance for Credit Losses and Loan Loss Experience
The total allowance for credit losses amounted to $91.0 million at December 31, 2022 compared to $78.8 million at
December 31, 2021. As discussed previously in the Provision for Loan Losses section, the increase in the ACL at
December 31, 2022 as compared to the prior year was driven by the loan growth experienced during the year
requiring an allowance be provided, combined with the deteriorating economic forecasts and loss driver inputs to
the CECL model. The economic forecasts provided by a third-party service for our CECL model calculations have
projected general weakening of the economy demonstrated in higher projected unemployment rates, lower GDP,
and declining price indices for both commercial real estate and residential mortgages. These worsening economic
projections translated to higher forecasted life of loan losses in our portfolio and a higher estimated ACL.
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 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.
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.
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 as
presented in the following table 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, 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.
44
The following table sets forth the allocation of the ACL by loan category at the dates indicated. However, the ACL 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 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 allocated
Unallocated
Total
% of
Loan
Category
% of
Loan
Category
% of
Loan
Category
% of
Loan
Category
% of
Loan
Category
2018
2019
2020
2021
2022
$ 17,718
2.76%
16,249
2.50%
11,316
1.45%
4,553
0.90%
2,889
0.63%
15,128
1.62%
16,519
1.99%
5,355
0.94%
1,976
0.37%
2,243
0.43%
11,354
0.95%
8,686
0.85%
8,048
0.83%
3,832
0.35%
5,197
0.49%
3,158
0.98%
4,337
1.31%
2,375
0.78%
1,127
0.33%
1,665
0.46%
40,709
2,900
90,967
—
$ 90,967
1.16%
4.78%
n/a
1.36%
30,342
2,656
78,789
—
78,789
0.95%
4.64%
n/a
1.30%
23,603
1,478
52,175
213
52,388
1.15%
2.74%
n/a
1.11%
8,938
972
21,398
—
21,398
0.47%
1.73%
n/a
0.48%
7,983
952
20,929
110
21,039
0.45%
1.33%
n/a
0.50%
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
45
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.
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,
2022
$ 6,665,145
6,293,280
90,967
2021
6,081,715
5,018,391
78,789
2020
4,731,315
4,702,743
52,388
2019
2018
4,453,466
4,249,064
4,346,331
4,161,838
21,398
21,039
Commercial, financial, and agricultural
$
(1,763)
(1,978)
(4,863)
(1,493)
(933)
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 net (charge-offs) recoveries
$
480
17
557
920
(633)
(422)
Average loans:
703
488
178
(1,762)
(309)
(2,680)
1,501
276
(37)
(347)
(579)
722
48
322
(981)
(522)
(4,049)
(1,904)
3,939
(901)
(347)
44
(472)
1,330
Commercial, financial, and agricultural
$
619,480
700,557
707,976
482,654
430,449
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:
857,880
619,928
615,717
503,183
555,354
1,091,788
951,573
1,028,334
1,074,938
1,015,360
326,592
3,338,710
58,830
300,291
2,391,845
54,197
316,593
1,981,763
52,360
346,331
366,416
1,872,666
1,723,117
66,559
71,142
$ 6,293,280
5,018,391
4,702,743
4,346,331
4,161,838
1.36%
1.30%
1.11%
0.48%
0.50%
215.56
29.40
12.94
11.24
2985.78 %
358.62%
865.37%
118.86%
n/m
n/m
90.55%
64.75%
52.38%
69.79%
119.08%
(0.01%)
(0.05%)
(0.09%)
(0.04%)
0.03%
Commercial, financial, and agricultural
(0.28%)
(0.28%)
(0.69%)
(0.31%)
(0.22%)
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
0.06%
—%
0.17%
0.03%
(1.08%)
0.11%
0.05%
0.06%
(0.07%)
(0.57%)
0.24%
0.03%
(0.01%)
(0.02%)
(1.11%)
0.14%
0.71%
—%
(0.09%)
0.09%
(0.09%)
(0.05%)
(0.78%)
—%
(0.66%)
46
Securities
Our securities portfolio totaled $2.9 billion at December 31, 2022, compared to $3.1 billion at December 31, 2021.
AFS securities were $2.3 billion at December 31, 2022, compared to $2.6 billion at December 31, 2021. HTM
securities were $541.7 million at December 31, 2022, compared to $513.8 million at December 31, 2021.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate
level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a
balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the
investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain
deposits. Over 99% of our mortgage-backed securities, which include both AFS and HTM securities, are issued by
GSEs or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at
fair value for the AFS portfolio and at cost for the HTM portfolio.
Securities Portfolio Composition
($ in thousands)
Securities available for sale:
US Treasury securities
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
As of December 31,
2022
2021
2020
$
168,758
57,456
2,045,000
43,279
—
69,179
2,514,805
46,430
—
70,206
1,337,706
45,220
Total securities available for sale
2,314,493
2,630,414
1,453,132
Securities held to maturity:
Mortgage-backed securities
State and local governments
Total securities held to maturity
15,150
526,550
541,700
20,260
493,565
513,825
29,959
137,592
167,551
Total securities
$ 2,856,193
3,144,239
1,620,683
Average total securities during year
$ 3,356,486
2,367,591
1,002,008
The decrease in securities for the year ended December 31, 2022 was primarily due the decrease in market
valuations on AFS securities associated with the sharp increase in bond yields. Also contributing to the decline was
regular principal repayments received on mortgage-backed securities more than offsetting purchases early in the
year.
The table below presents the composition, tax equivalent yields, and remaining maturities of our securities as of
December 31, 2022. 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.
47
2.66 %
1.52 %
1.56 %
1.79 %
Securities Portfolio Maturity Schedule
Government
& govt.-
sponsored
enterprise
securities
US Treasury
securities
Mortgage-
backed
securities (1)
Corporate
debt
securities
Total
Weighted
Average
Yield (2)
($ in thousands)
Securities available for sale
Remaining maturity:
One year or less
$
—
After one through five years
168,758
—
—
1,715
25,036
26,751
469,151
2,466
640,375
After five through ten years
After ten years
Fair Value
Amortized cost
Weighted-average yield (2)
Weighted average maturity years
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 (2)
Weighted average maturity years
—
—
57,456
1,480,763
14,891
1,553,110
—
93,371
886
94,257
$ 168,758
$ 174,420
57,456
71,957
2,045,000
2,467,839
43,279
2,314,493
44,340
2,758,556
1.57 %
2.33 %
1.48
1.17 %
7.07
1.71 %
7.09
3.78 %
1.57 %
2.86
6.15
Mortgage-
backed
securities (1)
State and
local
governments
Total
Weighted
Average
Yield (2)
$
—
—
—
13,316
1,834
997
14,313
61,509
63,343
—
464,044
464,044
— %
2.29 %
2.11 %
2.05 %
$
$
15,150
14,221
526,550
541,700
418,307
432,528
2.07 %
2.41 %
3.06
2.06 %
2.07 %
11.71
11.47
(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, 2022,
of the $57.4 million in AFS GSE securities, $32.3 million were issued by the FFCB, $23.6 million were issued by the
FHLMC, and the remaining $1.5 million were issued by the FHLB.
Nearly all of our $2.0 billion in AFS mortgage-backed securities at December 31, 2022 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 commerical mortgage-backed securities of
$810.9 million. Mortgage-backed securities vary in their repayment in correlation with the underlying pools of
mortgage loans.
At December 31, 2022, we held $541.7 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 $109.2 million at December 31, 2022.
Approximately $15.2 million of the HTM securities were mortgage-backed securities that have been issued by either
the FHLMC or FNMA. The remaining $526.6 million in HTM securities were 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.
48
Deposits
Deposits represent the primary funding source for our loans and investments. Total deposits amounted to $9.2
billion at December 31, 2022, an increase of $0.1 billion, or 1.1%, from December 31, 2021. Deposit growth for the
year was entirely organic as there were no acquisitions during 2022.
While total deposits increased in 2022, we experienced a decline in retail customer deposits of 1.7% from the prior
year end. Brokered deposits were utilized as needed during the year to fund loan growth and fluctuations in deposit
accounts.
We believe the decline in retail deposits was a result of customer behaviors shifting from the activity experienced
during the pandemic, combined with the increase in market rates and resulting competition for deposits. In addition,
although the number of net new deposit accounts increased, the average balance per account declined year-over-
year. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship
banking to new and existing customers, where borrowers are encouraged and normally expected to maintain
deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually
working to identify and introduce new products that will attract customers or enhance our appeal as a primary
provider of financial services.
The following table presents summary of the deposit balances and mix at each of the past five year ends.
Deposit Composition
2022
2021
2020
2019
2018
As of December 31,
($ 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
Savings accounts
Other time deposits
Time deposits
>$250,000
$ 3,566,003
39 %
3,348,622
37 % 2,210,012
35 %
1,515,977
31 % 1,320,697
28 %
1,514,166
16 %
1,593,231
17 % 1,172,022
19 %
912,784
18 %
916,374
20 %
2,416,146
26 %
2,562,283
28 % 1,581,364
25 %
1,173,107
24 % 1,035,523
22 %
728,641
464,343
276,319
8 %
5 %
3 %
708,054
547,669
8 %
6 %
519,266
8 %
424,415
415,269
7 %
462,898
9 %
9 %
432,390
9 %
445,594
10 %
357,355
4 %
355,441
6 %
356,033
7 %
269,453
6 %
Total customer deposits
8,965,618
97 %
9,117,214
100 % 6,253,374
100 %
4,845,214
98 % 4,420,031
95 %
Brokered Deposits
261,911
3 %
7,415
— %
20,222
— %
86,141
2 %
239,875
5 %
Total deposits
$ 9,227,529
100 %
9,124,629
100 % 6,273,596
100 %
4,931,355
100 % 4,659,906
100 %
Our deposit mix continues to be predominately transaction and non-time deposit accounts, with total time deposits
declining from 21% of total deposits at December 31, 2018 to 11% at December 31, 2022. Such a shift in mix 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. Approximately 88% of our time deposits mature within
one year.
As of December 31, 2022, we held approximately $3.5 billion in uninsured deposits, including $276.3 million of
uninsured time deposits.
49
The table below presents maturities of time deposits of more than $250,000 as of December 31, 2022.
($ in thousands)
As of December 31, 2022
3 Months
or Less
Over 3 to 6
Months
Over 6 to
12
Months
Over 12
Months
Total
Uninsured time deposits of more than $250,000
$
72,133
85,194
84,171
34,821
276,319
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 of 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, 2022 increased $220.1 million over the prior
year end. During 2022, FHLB advances increased $219.9 million related to short-term advances required to fund
loan growth and fluctuations in deposit balances. Our borrowings outstanding as of the dates presented were as
follows:
($ in thousands)
FHLB advances - long-term
Trust preferred capital issuances
December 31, 2022
$
December 31, 2021
221,842
69,076
290,918
(3,411)
287,507
1,974
69,076
71,050
(3,664)
67,386
Unamortized discounts on acquired borrowings
$
As noted in the table above, at December 31, 2022, 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 in our acquisition of Carolina Bank, and $12.4 million was
assumed in our acquisition of Select.
At December 31, 2022, the Company had three sources of readily available borrowing capacity:
•
•
•
A line of credit with the FHLB of approximately $847.1 million which can be structured as either short-term
or long-term borrowings, depending on the particular funding or liquidity need, and is secured by our FHLB
stock and a blanket lien on most of our real estate loan portfolio.
Federal funds lines of credit from several correspondent banks totaling $265.0 million which provide for
overnight unsecured federal funds purchased.
A line of credit with the Federal Reserve of approximately $165.4 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
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, as well as federal funds lines from
several correspondent banks.
Our overall liquidity started increasing in 2020 and continued into 2021 due to significant and continued deposit
growth that outpaced our loan growth. During 2022, we have managed our primary liquid assets (cash and AFS
securities) to lower levels in order to meet loan demand and maximize our margins. In addition during 2022, we
have had decreases in retail deposit levels as market rates for deposits became more competitive and customer
behaviors shifted from the activity experienced during the pandemic.
50
Our liquid assets as a percentage of our total deposits and borrowings amounted to 27.2% at December 31, 2022.
We 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, 2022.
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, 2022
Borrowings
Operating leases
Time deposits, including brokered deposits
Non-qualified postretirement plan liabilities
Committed investment obligations
Estimated interest expense on borrowings and
time deposits (1)
Total contractual cash obligations
Less
than 1 Year
$
220,991
2,360
882,740
340
14,288
98
3,869
89,299
712
14,287
12,887
$ 1,133,606
11,646
119,911
104
3,232
29,649
772
—
10,169
43,926
66,314
18,441
287,507
27,902
884
1,002,572
5,783
—
7,607
28,575
35,928
70,630
127,350
1,424,793
(1) Represents forecasted interest expense on borrowings and time deposits based on interest rates and balances at
December 31, 2022. Forecasts are based on the contractual maturity of each liability.
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial Commitments
As of December 31, 2022
Less
than 1 Year
1-3 Years
4-5 Years
After 5 Years
Total
Amounts
Committed
Credit cards
$
—
—
—
202,995
202,995
Lines of credit and loan commitments
Standby letters of credit
393,609
18,912
608,245
149,589
1,005,938
2,157,381
1,315
—
—
20,227
Total commercial commitments
$
412,521
609,560
149,589
1,208,933
2,380,603
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, 2022, we had $20.2 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
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 he Bank can meet its contractual cash obligations
and existing commitments from normal operations.
51
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2022 amounted to $1.0 billion compared to $1.2 billion at December 31,
2021. 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. Finally, fluctuations in the amount of AOCI, generally driven
by market rate changes resulting in increases or decreases in unrealized gains/losses on AFS securities, can have
a significant impact on total equity. In 2022, the most significant factors that impacted our shareholders' equity were
(1) $317.0 million reduction in equity related to changes in AOCI driven by higher unrealized losses on AFS
securities; (2) $146.9 million net income reported for 2022, which increased equity, and (3) common stock dividends
declared of $31.4 million, which reduced 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, 2022, approximately $830.8 million of the Company’s
investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
Our regulatory capital ratios as of December 31, 2022, 2021, and 2020 are presented in the table below. All of our
capital ratios significantly exceeded the minimum regulatory thresholds for all periods presented.
Risk-Based and Leverage Capital Ratios
($ 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
Add: Trust preferred securities eligible for Tier I capital treatment
Total Tier I leverage capital
Tier II capital:
Add: Allowable allowance for credit losses and unfunded commitments
Add: Other Tier II Capital
Tier II capital additions
Total capital
Total risk weighted assets
Adjusted fourth quarter average assets
As of December 31,
2022
2021
2020
$ 1,031,596
(363,202)
341,975
1,010,369
63,589
1,230,575
(366,609)
24,970
888,936
63,336
1,073,958
952,272
97,126
—
97,126
88,692
—
88,692
893,421
(239,702)
(14,350)
639,369
52,496
691,865
52,388
582
52,970
$ 1,171,084
1,040,964
744,835
$ 7,762,894
7,094,787
4,846,322
$ 10,215,571
10,144,760
7,001,834
Risk-based and Leverage capital ratios:
Common equity Tier I capital to Tier I risk adjusted assets
Tier I capital to Tier I risk adjusted assets
Total risk-based capital to Tier II risk-adjusted assets
Tier I leverage capital to adjusted fourth quarter average assets
13.02 %
13.83 %
15.09 %
10.51 %
12.53 %
13.42 %
14.67 %
9.39 %
13.19 %
14.28 %
15.37 %
9.88 %
52
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, 2022, our leverage ratio was 10.51% compared to the
regulatory well capitalized bank-level threshold of 4.00% and our total risk-based capital ratio was 15.09%
compared to the 10.50% regulatory well capitalized threshold. The increase in capital levels in 2022 was related to
the growth in net income.
In addition to regulatory capital ratios, we also closely monitor our ratio of TCE to tangible assets. This ratio was
6.39% at December 31, 2022 compared to 8.38% at December 31, 2021, with the decline of 199 basis points
related primarily to the higher unrealized loss on available for sale securities included in equity
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.
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 did not engage in significant derivatives activities in 2022 and have no
current plans to do so.
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.
53
Selected Consolidated Financial Data
($ in thousands, except per share data)
Income Statement Data
Interest income
Interest expense
Net interest income
Provision for (reversal of) loan losses
(Reversal of) 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
Total risk-based capital ratio
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,
2022
2021
2020
2019
2018
$
$
340,957
16,103
324,854
12,600
(200)
312,454
67,985
195,220
185,219
38,283
146,936
4.12
4.12
0.88
49.00
32.90
42.84
28.89
$ 10,625,049
6,665,145
90,967
376,938
9,227,529
287,507
1,031,596
$ 10,556,230
6,293,280
9,989,185
9,283,505
5,758,001
1,096,913
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
1.39%
13.40%
15.09%
3.28%
72.23%
1.36%
0.36%
(0.01%)
1.13%
9.86%
14.67%
3.16%
66.65%
1.30%
0.50%
(0.05%)
1.20%
9.32%
15.37%
3.56%
75.42%
1.11%
0.64%
(0.09%)
1.53%
11.32%
14.89%
4.00%
90.31%
0.48%
0.62%
(0.04%)
1.57%
12.27%
13.97%
4.09%
91.19%
0.50%
0.74%
0.03%
Note - During 2021, the Company completed a significant whole-bank acquisition impacting the comparisons for that year. See additional
discussion under "Mergers and Acquisitions" in Item 1.
54
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes
in interest rates, exchange rates, and equity prices. The Company’s market risk is composed primarily of interest
rate risk inherent in the normal course of lending and deposit-taking activities. We are also exposed to market risk
in our investing activities. We do not have any trading assets or activities.
Interest Rate Risk
Net interest income is our most significant component of earnings and we consider interest rate risk to be our most
significant market risk. Our goal is to structure our asset/liability composition to maximize net interest income while
managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income
and capital in either a rising or declining interest rate environment. Profitability is affected by fluctuations in interest
rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest
rates of the underlying assets and liabilities do not change at the same speed, to the same extent or on the same
basis.
Interest rate risk is monitored through the use of three complementary modeling tools: static gap analysis, earnings
simulation modeling, and economic value simulation (net present value estimation). Each of these models
measures changes in a variety of interest rate scenarios. While each of the interest rate risk models has limitations,
taken together they represent a reasonably comprehensive view of the magnitude of our interest rate risk, the level
of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which
measures aggregate repricing values, is less utilized because it only measures the magnitude of the timing
differences and does not address repricing lags, market influences, or management actions. Earnings simulation
and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by
management on a regular basis and are discussed further below. From the various model results and our
expectations regarding future interest rate movements, the national, regional and local economies, and other
financial and business risk factors, we quantify the overall magnitude of interest sensitivity risk and then determine
appropriate strategies and practices governing asset growth and pricing, funding sources and pricing, and off-
balance sheet commitments.
Earnings Simulation Analysis
We use net interest income simulations which measure the short-term earnings exposure from changes in market
rates of interest. The model calculates an earnings estimate based on current and projected balances and rates,
incorporating our current financial position with assumptions regarding future business to calculate net interest
income under varying hypothetical rate scenarios. This method is subject to the accuracy of the assumptions that
underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than
other analyses, such as the static gap analysis.
Assumptions used in the model are derived from historical trends and management’s outlook. The model assumes
a static balance sheet with cash flows reinvested in similar instruments to maintain the balance sheet levels and
current composition. Actual cash flows and repricing characteristics for our balance sheet instruments are input to
the model. The model incorporates market-based assumptions regarding the impact of changing interest rates on
the prepayment rate of certain assets and liabilities. Because these assumptions are inherently uncertain, actual
results may differ from simulated results.
Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing
interest rates in both a "shocked" instantaneous move and a "ramped" move of rates. Interest rates on different
asset and liability accounts move differently when the prime rate changes and such assumptions are reflected in the
different rate scenarios. The model does not take into account any future actions that management may take to
mitigate the impact of interest rate changes, and it is our strategy is to proactively change the volume and mix of our
balance sheet in order to mitigate our interest rate risk.
55
The following table presents the estimated net interest income sensitivity over a 12-month horizon for the specified
rate change levels presented. This change in interest rates assumes parallel shifts in the yield curve and does not
take into account changes in the slope of the yield curve.
Percentage change in Net Interest Income (1)
Change in Interest Rates (in basis points)
December 31, 2022
December 31, 2021
+ 400
+ 300
+ 200
+ 100
- 100
- 200
- 300
- 400
(1.4)%
(1.2)%
(1.0)%
(0.3)%
(1.5)%
(5.1)%
(10.1)%
(15.1)%
8.9%
6.6%
4.3%
2.0%
(2.5)%
(5.6)%
(8.2)%
(9.6)%
(1) - The percentage change represents the projected net interest income for 12 months on a flat balance sheet in a stable rate environment as
compared to the projected net interest income in the various rate scenarios.
From a net interest income perspective, the Company has been fairly neutral historically with no significant change
in the short-term (within a 12-month period) and within the lower ranges (+ - 100-200 basis points) of interest rate
changes. The Company was more asset sensitive at December 31, 2021 as compared to its position at
December 31, 2022. Asset sensitivity generally indicates that in a rising interest rate environment the Company’s
net interest income would increase and in a decreasing interest rate environment the Company’s net interest
income would decrease. However, the Company's sensitivity position has shifted such that, in the short-term it is
projected that net interest income will likely be essentially flat or fall in both a rising and falling rate environment.
This shift is due in part to the changing market characteristics of certain loan and deposit products as well as to the
shift in the yield curve. Prior to the recent Federal Reserve actions to raise short-term interest rates, the yield curve
was very low and rather flat. The rate increases in 2022 resulted in a steepening of the yield curve on the short end
(within 1 year), while the longer end of the curve continues to be flat and has actually inverted between 1 and 10
years, meaning that the yield on short-term instruments (1 year) are higher than longer-term instruments (10 years).
A flat or inverted interest rate curve is an unfavorable interest rate environment for many financial institutions,
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 or invert, the profit spread we realize between loan yields
and deposit rates narrows, which pressures our NIM.
As demonstrated in the above table, we would expect net interest income to decline in a decreasing interest rate
environment, as interest-earning assets reprice to lower rates and interest-bearing deposits remain at or near their
floors. With regard to rising rates with an immediate increase or shock in market rates over the short-term (12-
month horizon), we would also expect to realize a decline in net interest income, although not to the extent
projected in a declining rate environment. This is due in part to the composition of our loan portfolio which is
comprised of 20% variable rate loans which could immediately reprice, thus limiting the magnitude of the impact of
rate increases. In addition, the model includes an assumption of a quick repricing up of the funding base in a rising
rate environment, and our recent shift to higher-cost brokered deposits and short-term borrowings in our funding mix
has lead to a narrowing of the interest rate spread in the projection. As previously noted, these assumptions are
inherently uncertain, and actual results may differ from simulated results. Further, the interest rate simulation
models do not take into consideration growth, changes in balance sheet mix or composition, or other strategies that
management would employee in either a rising or a falling rate scenario.
Economic Value Simulation
Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest
rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic
value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net
economic value over different rate environments is an indication of the longer-term earnings capability of the
balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The
economic value simulation uses instantaneous rate shocks to the balance sheet.
56
The following table presents the estimated change in net economic value for the specified change levels presented.
This change in interest rates assumes parallel shifts in the yield curve and does not take into account changes in
the slope of the yield curve.
Percentage change in Economic Value of Equity (1)
Change in Interest Rates (in basis points)
December 31, 2022
December 31, 2021
+ 400
+ 300
+ 200
+ 100
- 100
- 200
- 300
- 400
(11.9)%
(8.9)%
(6.0)%
(2.3)%
0.7%
(2.4)%
(8.4)%
(18.2)%
3.3%
3.5%
3.7%
3.0%
(15.4)%
(32.7)%
(34.4)%
(35.5)%
(1) - The percentage change represents our economic value of equity in a stable rate environment as compared to the economic value of equity
in the various rate scenarios.
As of December 31, 2022, the Company’s economic value of equity is generally liability sensitive in a rising interest
rate environment compared to its position as of December 31, 2021, while the extent of exposure to falling rates has
improved from the prior year end. The increase in exposure to rising rates in the current year in primarily due to the
composition of the consolidated balance sheets combined with the pricing characteristics and assumptions of
certain deposits. Specifically, during 2022, non-maturity deposits, generally with lower betas, have runoff and have
been replaced with short-term FHLB advances and short-term brokered deposits. Refer also to the discussion
above under Earnings Simulation Analysis.
Impact of Inflation and Changing Prices
Our financial statements included in Item 8 “Financial Statements and Supplementary Data” of this Report have
been prepared in accordance with GAAP, which requires the financial position and operating results to be measured
principally in terms of historic dollars without considering the change in the relative purchasing power of money over
time due to inflation.
Nearly all of the Company’s assets and liabilities are monetary in nature, and as such, changes in interest rates (as
discussed above) generally affect the financial condition of the Company to a greater degree than changes in the
rate of inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not
necessarily change at the same rate or in the same magnitude as the inflation rate. Inflation affects the Company’s
results of operations mainly through increased operating costs, and the impact of inflation on banks in general is
normally not as significant as its influence on those businesses that have large investments in plant and inventories.
We review pricing of our products and services, as well as our controllable operating and labor costs in light of
current and expected costs due to inflation, to mitigate the inflationary impact on financial performance to the extent
possible.
57
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2022 and 2021
($ 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 $432,528 in 2022 and $511,699 in 2021)
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 deposits
Interest-bearing 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 2022 and 2021
Common stock, no par value per share. Authorized: 60,000,000 shares
Issued & outstanding: 35,704,154 shares in 2022 and 35,629,177 shares in 2021
Retained earnings
Stock in rabbi trust assumed in acquisition
Rabbi trust obligation
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
58
2022
2021
$
101,133
169,185
270,318
128,228
332,934
461,162
2,314,493
2,630,414
541,700
513,825
1,282
—
19,257
61,003
6,665,145
6,081,715
(90,967)
(78,789)
6,574,178
6,002,926
134,187
18,733
29,710
364,263
12,675
658
164,592
198,260
136,092
20,719
25,896
364,263
17,827
3,071
165,786
86,660
$ 10,625,049
10,508,901
$
3,566,003
5,661,526
9,227,529
287,507
2,738
19,391
56,288
3,348,622
5,776,007
9,124,629
67,386
607
21,192
64,512
9,593,453
9,278,326
—
—
725,153
648,418
(1,585)
1,585
(341,975)
722,671
532,874
(1,803)
1,803
(24,970)
1,031,596
1,230,575
$ 10,625,049
10,508,901
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2022, 2021 and 2020
($ 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
Interest on deposits
Interest on borrowings
Total interest expense
Net interest income
Provision for loan losses
(Reversal of) 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 (gains) 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.
59
2022
2021
2020
$
278,027
219,013
213,099
53,536
4,387
5,007
340,957
11,349
4,754
16,103
324,854
12,600
(200)
12,400
312,454
15,523
26,294
2,102
5,195
2,608
5,076
3,847
—
7,340
67,985
96,321
21,397
117,718
12,796
5,808
5,072
3,684
(372)
50,514
195,220
185,219
38,283
32,076
2,402
2,427
255,918
7,881
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
16,301
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
$
$
$
146,936
95,644
81,477
4.12
4.12
0.88
3.19
3.19
0.80
2.81
2.81
0.72
35,485,620
35,674,730
29,876,151
30,027,785
28,839,866
28,981,567
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
Years Ended December 31, 2022, 2021 and 2020
($ 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 arising during period
Tax expense
Amortization of unrecognized net actuarial (gain) loss
Tax expense (benefit)
Other comprehensive (loss) income
Comprehensive (loss) income
See accompanying notes to consolidated financial statements.
2022
2021
2020
$
146,936
95,644
81,477
(411,996)
94,677
—
—
695
(159)
(288)
66
(53,752)
12,352
1,237
(284)
872
(201)
592
(136)
(317,005)
$
(170,069)
(39,320)
56,324
18,729
(4,304)
(8,024)
1,844
589
(135)
686
(158)
9,227
90,704
60
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2022, 2021 and 2020
($ in thousands, except per share data)
Shares
Amount
Common Stock
Stock in
rabbi trust
assumed
in
acquisition
Retained
Earnings
Rabbi
trust
obligation
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balances, January 1, 2020
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 loss
(107)
(18)
105
(4,036)
(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
Net income
Cash dividends declared ($0.88 per common
share)
Change in Rabbi Trust Obligation
Stock withheld for payment of taxes
Stock-based compensation
Other comprehensive loss
(25)
100
(840)
3,322
146,936
(31,392)
218
(218)
146,936
(31,392)
—
(840)
3,322
(317,005)
(317,005)
Balances, December 31, 2022
35,704 $ 725,153
648,418
(1,585)
1,585
(341,975)
1,031,596
See accompanying notes to consolidated financial statements.
61
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2022, 2021 and 2020
2022
2021
2020
$
146,936
95,644
81,477
($ in thousands)
Cash Flows From Operating Activities
Net income
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses
Net security premium amortization
Deferred tax benefit
Loan discount accretion
Other purchase accounting accretion and amortization, net
Foreclosed property (gains) losses/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 in other assets
Increase (decrease) 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
(Purchases) redemptions of FRB and FHLB stock, net
Purchases of bank owned life insurance
Proceeds from bank owned life insurance death benefits
Purchases of other investments
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 increase (decrease) in short-term borrowings
Proceeds from long-term borrowings
Payments on long-term borrowings
Cash dividends paid – common stock
Repurchases of common stock
Payment of taxes related to stock withheld
Net cash provided by financing activities
(Decrease) increase in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
$
62
12,400
12,005
(1,810)
(5,622)
(340)
(372)
—
(4,069)
(3,847)
(301)
6,859
1,986
(1,801)
2,982
3,684
2,800
(7,178)
(104,596)
124,181
(74,452)
119,549
(3,814)
11,352
2,131
(8,009)
230,654
(354,765)
(39,004)
251,314
6,500
—
(17,244)
—
8,312
(7,990)
(558,398)
2,904
(5,287)
299
—
—
(713,359)
103,494
220,000
—
(133)
(30,660)
—
(840)
291,861
(190,844)
461,162
270,318
15,031
14,058
(4,800)
(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)
17,412
(683)
394
142,335
(1,572,355)
(271,169)
358,259
13,642
106,484
2,043
(25,000)
—
(3,434)
(97,559)
3,995
(9,402)
313
208,992
11,314
(1,273,877)
1,258,193
—
—
(5,729)
(22,228)
(4,036)
(786)
1,225,414
93,872
367,290
461,162
35,039
5,019
(10,007)
(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)
267
(1,250)
9,805
58,333
(1,060,054)
(133,611)
223,842
33,030
219,697
9,851
—
—
(1,258)
(233,788)
2,485
(12,363)
189
(9,559)
—
(961,539)
1,342,340
(198,000)
150,000
(202,035)
(20,936)
(31,868)
(307)
1,039,194
135,988
231,302
367,290
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2022, 2021 and 2020
(Continued)
($ in thousands)
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.
2022
2021
2020
14,312
39,722
119
(317,319)
7,857
—
—
—
10,206
32,506
2,285
(41,400)
7,125
2,191
(10,229)
See Note 2
20,812
29,604
1,583
14,425
5,144
253
—
—
See accompanying notes to consolidated financial statements.
63
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2022
Summary 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. 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.
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 Company is also the parent company for
a series of statutory trusts that were formed for the purpose of issuing trust preferred debt securities. The trusts are
not consolidated for financial reporting purposes as they are variable interest entities and the Company is not the
primary beneficiary.
All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been
made to the 2021 and 2020 consolidated financial statements to be comparable to 2022. These reclassifications
had no effect on net income. Subsequent events have been evaluated through the date of filing this Annual Report
Form 10-K.
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.
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 and accreted 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.
64
Allowance for Credit Losses ("ACL") - Securities Held to Maturity - Since its adoption of ASC 326 ("CECL"),
the Company measures expected credit losses on HTM debt securities on a pooled basis. 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.
The CECL assumptions, including reasonable and supportable forecast periods, reversion method, and
prepayments as applicable, are consistent with those utilized for the ACL on loans as discussed further below.
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. Accrued interest receivable
of $4.3 million and $3.7 million at December 31, 2022 and December 31, 2021, respectively, on HTM debt securities
was excluded from the estimate of credit losses.
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. 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. Accrued interest receivable of $5.7 million and $5.0 million at December 31, 2022 and December 31, 2021,
respectively, on AFS debt securities 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 no SBA loans held for sale at December 31, 2022 and there
were $9.6 million in SBA loans held for sale at December 31, 2021. Also included in the balance at December 31,
2021 was $51.4 million of loans assumed in the Company's acquisition of Select Bancorp, Inc. ("Select") that were
designated for sale as not aligning with the Company's strategy or markets. The loans were carried at the the lower
of cost or market and the disposition of these loans was completed in the first quarter of 2022 at a price that
approximated the carrying value.
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
$19.7 million at December 31, 2022 and $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
65
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 Financial Assets with Credit Deterioration ("PCD") - 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 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 is an estimate that is deducted from the amortized cost basis of
the financial asset to present the net carrying value at the amount expected to be collected on the financial assets.
The level of the allowance is determined under the CECL methodology and includes management's evaluation of
historical default and loss experience, current and projected economic conditions, asset quality trends, known and
inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay a loan (including the
timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, and
other pertinent factors.
Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding,
purchase discounts and premiums, and deferred loan fees and costs. Accrued interest receivable is presented
separately on the consolidated balance sheets and excluded from the estimate of credit losses. Loans are charged
off when the Company determines that such financial assets are deemed uncollectible. The ACL is increased
through provision for loan losses and decreased by charge-offs, net of recoveries of amounts previously charged-
off.
The ACL is measured on a collective basis for pools of loans with similar risk characteristics. 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, are
applied to the discounted cash flows for each pool, while considering prepayment and principal curtailment
assumptions driven by each loan's collateral type. 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. 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.
The Company has identified the following primary pools for measuring expected credit losses. There are additional
sub-segmentations within each pool, including risk categories.
66
•
•
•
• Owner occupied commercial real estate loans - Owner occupied commercial real estate mortgage loans are
secured by commercial office buildings, industrial buildings, warehouses or retail buildings where the owner
of the building occupies the property. For such loans, repayment is largely dependent upon the operation of
the borrower's business.
Non-owner occupied commercial real estate loans - These loans represent investment real estate loans
secured by office buildings, industrial buildings, warehouses, retail buildings, and multifamily residential
housing. Repayment is primarily dependent on lease income generated from the underlying collateral.
Consumer real estate mortgage loans - Consumer real estate mortgage consists primarily of loans secured
by 1-4 family residential properties, including home equity lines of credit. Repayment is primarily dependent
on the personal cash flow of the borrower and may be affected by changes in general economic conditions.
Construction and land development loans - Construction and land development loans include loans where
the repayment is dependent on the successful completion and eventual sale, refinance or operation of the
related real estate project and are thus impacted by market demand and real estate valuations.
Construction and land development loans include 1-4 family construction projects and commercial
construction projects.
Commercial and industrial loans - Commercial and industrial loans include loans to business enterprises
issued for commercial, industrial and/or other professional purposes. These loans are generally secured by
equipment, inventory, and accounts receivable of the borrower and repayment is primarily dependent on
business cash flows.
Consumer and other loans - Consumer and other loans include all loans issued to individuals not included
in the consumer real estate mortgage classification, including automobile loans, consumer credit cards and
loans to finance education, among others. Many consumer loans are unsecured and repayment is primarily
dependent on the personal cash flow of the borrower which may be impacted by changes in economic
conditions and unemployment.
•
•
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, which incorporates an equal probability
of the United States economy performing better or worse than the projection, along with the alternative scenarios,
are evaluated by management to determine the best estimate within the range of expected credit losses.
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.
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.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposure - 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
67
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.
Troubled Debt Restructurings ("TDR") - 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.
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 or transfer to foreclosed properties or liquidation of the loan, the remaining discount is amortized,
along with any remaining servicing asset and deferred loan costs.
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
initially recorded at fair value and 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.
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 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.
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. 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
68
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.”
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 its investments in limited partnerships and limited liability
companies (“LLCs”) using the equity method of accounting if the percentage ownership and degree of management
influence in the investments warrants such accounting treatment. 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, 2022 and 2021, the Company’s investments in limited partnerships and LLCs totaled $18.5 million
and $11.3 million, respectively, and are included in "Other assets".
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.
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. 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
69
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, 2022, the Company had two reporting units which are evaluated for impairment. If the carrying value
of a reporting unit exceeds its fair value, the Company utilizes various valuation techniques to determine whether
the implied fair value of the goodwill exceeds its carrying value. 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.
Variable Interest Entities - The Company's statutory trust subsidiaries (First Bancorp Capital Trust II, Trust III and
Trust IV, Carolina Capital Trust, and New Century Statutory Trust I), ("the Trusts") qualify as variable interest entities
under ASC 810, “Consolidation.” Notes issued by the Company to the Trusts in return for the proceeds from the
issuance of the trust preferred securities have terms that are substantially the same as the corresponding trust
preferred securities. As qualified variable interest entities, the Trusts' balance sheet and statement of operations
have never been consolidated with those of the Company because the Company is not the primary beneficiary.
Further, the Company has no exposure to loss of the operations of the Trusts as the Company is limited to the
repayment of the underlying obligations and would not absorb the losses of the Trusts if losses were to occur. The
trust preferred securities qualify as capital for regulatory capital adequacy requirements.
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.
70
Recent Accounting Pronouncements -
Accounting Standards Adopted in 2022
The Company did not adopt any accounting standards during 2022.
Accounting Standards Pending Adoption
ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage
Disclosures." The amendments contained in this Accounting Standards Update ("ASU") eliminate the accounting
guidance for troubled debt restructurings by creditors, while enhancing disclosure requirements for certain loan
refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This ASU also
requires entities to disclose current period gross write-offs by year of origination for financing receivables and net
investment in leases. The amendments in this ASU will be effective for fiscal years beginning after December 15,
2022 including interim periods within those fiscal years and early adoption is permitted. The entity must have
adopted the amendments in ASU 2016-13 ("CECL") to adopt the amendments in this ASU. The Company has
evaluated the adoption of the new guidance on the consolidated financial statements and does not expect it to have
a material effect on its financial statements.
ASU 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to
Contractual Sale Restrictions." This ASU clarifies that a contractual restriction on the sale of an equity security is
not considered part of the unit of account of the equity security, and, therefore, is not considered in measuring fair
value. The amendments in this ASU are effective for public business entities for fiscal years beginning after
December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and
annual financial statements that have not yet been issued or made available for issuance. The Company does not
expect the ASU to have a material effect on its financial statements.
ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." In 2020, the FASB
issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting, which provided optional guidance to ease the potential burden in accounting for (or
recognizing the effects of) reference rate reform. The objective of the guidance in Topic 848 was to provide relief
during the temporary transition period and the FASB included a sunset provision based on expectations of when the
London Interbank Offered Rate (LIBOR) would cease being published. The United Kingdom Financial Conduct
Authority has announced that the intended LIBOR cessation date has been extended from December 31, 2021 to
June 30, 2023. As such, ASU 2022-06 defers the sunset date previously set to December 31, 2024, after which
entities will no longer be permitted to apply the relief in Topic 848; moreover, it applies to all entities, subject to
meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or
another reference rate expected to be discontinued because of reference rate reform. The Company does not
expect this ASU to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are
not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 2. Acquisitions and Dispositions
GrandSouth Acquisition
On January 1, 2023, the Company completed its acquisition of GrandSouth Bancorporation ("GrandSouth"), in an
all-stock transaction pursuant to the previously announced Agreement and Plan of Merger and Reorganization ("the
Merger Agreement"), dated June 21, 2022, between the Company and GrandSouth. At the closing of the
transaction, GrandSouth merged into the Company. Following the merger of the Company and GrandSouth,
GrandSouth Bank, a wholly-owned subsidiary of GrandSouth, merged into the Bank with the Bank being the
surviving entity.
Pursuant to the Merger Agreement, each share of common and preferred stock of GrandSouth issued and
outstanding immediately prior to the effective time of the acquisition was converted into 0.91 shares of the
Company's common stock. As a result, the Company issued 5,032,834 shares of the Company common stock
effective January 1, 2023. In addition, approximately 596,000 GrandSouth common stock options were converted
to options to acquire 0.91 shares of the Company's common stock with an average exercise price of approximately
$18.22. The consideration transferred at the close of the transaction was approximately $226.9 million.
71
Effective with the transaction close, eight branches in South Carolina were added to the Company's branch network.
Immediately prior to the completion of the acquisition, at December 31, 2021, GrandSouth Bank reported total
assets of $1.2 billion, total loans of $1.0 billion, and total deposits of $1.1 billion on a Call Report filed with federal
banking regulators. The acquisition accomplished the Company's strategic initiative to expand its presence in South
Carolina, specifically in the the high-growth markets of the state including Greenville, Charleston and Columbia.
Significant synergies are anticipated to be gained from the acquisition, with asset growth and revenue enhancement
opportunities from the new markets and expanded customer base. Accordingly, the Company anticipates
recognizing goodwill in the transaction related primarily to the reasons noted, as well as the positive earnings of
GrandSouth. It is anticipated that the goodwill which will result from this transaction will be non-deductible for tax
purposes.
Given that the initial purchase accounting for the acquisition in accordance with GAAP for this business combination
is not yet completed, the Company is not yet able to disclose the preliminary fair value of the GrandSouth assets
acquired and liabilities assumed.
Select Acquisition
On October 15, 2021, the Company completed the acquisition of 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 the Select acquisition 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 $132.4 million in goodwill that resulted from this
transaction is non-deductible for tax purposes.
72
($ 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
Goodwill recorded related to acquisition of Select
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
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 was 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
73
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 were 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 were 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 was 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 $3.9 million. If the Select acquisition had occurred at the beginning of 2020, the
acquisition date credit loss reserve amounts would have been included in the fair value measurements of Select
and been included in the goodwill calculation. Expenses related to systems conversions and other costs of
integration were recorded during 2022. The Company expects to achieve further operating cost savings and other
business synergies as a result of the acquisition.
The following table also discloses the impact of the acquisition of Select from the acquisition date of October 15,
2021 through December 31, 2021. These amounts are included in the Company’s consolidated financial statements
as of and for the year ended December 31, 2021. Merger-related costs have been excluded from these amounts
and the provisions for credit loss amounts associated with non-PCD loans and unfunded commitments that were
discussed above have also been excluded.
74
($ 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. ("First Bank
Insurance"), 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 $2.8 million in other intangibles.
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2022 and 2021 are
summarized as follows:
2022
2021
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
($ in thousands)
Securities available for sale:
US Treasury securities
$ 174,420
168,758
—
(5,662)
—
—
Government-sponsored
enterprise securities
Mortgage-backed
securities
Corporate bonds
71,957
57,456
—
(14,501)
71,951
69,179
2,467,839
2,045,000
4
(422,843) 2,545,150
2,514,805
44,340
43,279
—
(1,061)
45,380
46,430
—
—
—
(2,772)
9,489
1,106
(39,834)
(56)
Total available for sale $ 2,758,556 2,314,493
4
(444,067) 2,662,481
2,630,414
10,595
(42,662)
Securities held to maturity:
Mortgage-backed
securities
State and local
governments
$ 15,150
14,221
526,550
418,307
Total held to maturity
$ 541,700
432,528
—
7
7
(929)
20,260
20,845
585
—
(108,250)
493,565
490,854
(109,179)
513,825
511,699
2,955
3,540
(5,666)
(5,666)
All of the Company’s mortgage-backed securities were issued by government-sponsored enterprises ("GSEs"),
except for private mortgage-backed securities with a fair value of $0.8 million and $0.9 million as of December 31,
2022 and 2021, respectively.
75
The following table presents information regarding securities with unrealized losses at December 31, 2022:
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
($ in thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
US Treasury securities
$
168,758
5,662
—
—
168,758
5,662
Government-sponsored
enterprise securities
—
—
57,456
14,501
57,456
Mortgage-backed securities
221,006
18,215
1,835,958
405,557
2,056,964
14,501
423,772
1,061
40,644
48,385
947
8,323
886
114
41,530
368,897
99,927
417,282
108,250
Corporate bonds
State and local governments
Total temporarily impaired
securities
$
478,793
33,147
2,263,197
520,099
2,741,990
553,246
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
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Government-sponsored
enterprise securities
$
21,436
522
47,743
2,250
69,179
Mortgage-backed securities
1,773,022
25,977
404,484
13,857
2,177,506
Corporate bonds
999
1
945
55
1,944
State and local governments
228,279
3,797
34,398
1,869
262,677
2,772
39,834
56
5,666
Total temporarily impaired
securities
$ 2,023,736
30,297
487,570
18,031
2,511,306
48,328
As of December 31, 2022, the Company's securities portfolio held 666 securities of which 644 securities were in an
unrealized loss position. As of December 31, 2021, the Company's securities portfolio held 648 securities of which
371 securities were in an unrealized loss position.
In the above tables, all of the securities that were in an unrealized loss position at December 31, 2022 and 2021 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
severity of the impairment. The state and local government investments are comprised almost entirely of highly-
rated municipal bonds issued by state and local governments throughout the nation. The Company has no
significant concentrations of bond holdings from one state or local government entity. Nearly all of our mortgage-
backed securities were issued by FHLMC, FNMA, GNMA, or the SBA, each of which is a government agency or
GSE and guarantees the repayment of its securities. 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.
At December 31, 2022 and 2021, the Company determined that expected credit losses associated with HTM
securities and AFS debt securities were insignificant.
The book values and approximate fair values of investment securities at December 31, 2022, 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.
76
($ 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
$
25,078
176,932
87,707
1,000
25,036
171,224
72,348
885
2,467,839
2,045,000
$ 2,758,556
2,314,493
—
997
61,509
464,044
15,150
541,700
—
873
50,726
366,708
14,221
432,528
At December 31, 2022 and 2021, investment securities with carrying values of $758.0 million and $951.4 million,
respectively, were pledged as collateral for public deposits.
At December 31, 2022 and 2021, there were no holdings of securities of any one issuer, other than the US
Government and its agencies or GSEs, in an amount greater than 10% of shareholders' equity.
In 2022, there were no sales of investment securities. In 2021, the Company received proceeds from sales of
securities of $106.5 million and recorded in $1.2 million net losses from the sales. In 2020, the Company received
proceeds from sales of securities of $219.7 million and recorded $8.0 million in net gains from the sales.
Included in “Other Assets” in the consolidated balance sheets are investments in FHLB and Federal Reserve stock
totaling $39.6 million and $22.3 million at December 31, 2022 and 2021, respectively. These investments do not
have readily determinable fair values. The FHLB stock had a cost and fair value of $14.7 million and $4.6 million at
December 31, 2022 and 2021, 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 $24.9 million and $17.8 million at December 31, 2022 and 2021, respectively, and is a requirement
for Federal Reserve member bank qualification. Periodically, both the FHLB and Federal Reserve recalculate the
Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at
cost. The Company determined that neither stock was impaired at either period end.
The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public
offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain
litigation against Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the
conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at
December 31, 2022 was approximately 1.60, which means the Company would receive approximately 19,758 Class
A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value
and is carried at zero. If a readily determinable fair value becomes available for the Class B shares, or upon the
conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a
credit to earnings.
77
Note 4. Loans, Allowance for Credit Losses, and Asset Quality Information
The following is a summary of the major categories of total loans outstanding:
($ 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
Subtotal
Unamortized net deferred loan fees
Total loans
December 31, 2022
December 31, 2021
Amount
Percentage
Amount
Percentage
641,941
934,176
1,195,785
323,726
3,510,261
60,659
6,666,548
9 %
14 %
18 %
5 %
53 %
1 %
648,997
828,549
1,021,966
331,932
3,194,737
57,238
11 %
13 %
17 %
5 %
53 %
1 %
100 %
6,083,419
100 %
(1,403)
$ 6,665,145
(1,704)
6,081,715
Also included in the table above are 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 SBA Loans included in table above
Unguaranteed portions of SBA Loans included in table above
Total SBA loans included in the table above
Sold portions of SBA loans with servicing retained - not included in table above
December 31,
2022
December 31,
2021
$
$
$
31,893
116,910
148,803
48,377
122,772
171,149
392,370
414,240
As of December 31, 2022, there were essentially no remaining loans originated under the SBA's Paycheck
Protection Program ("PPP") as provided for under the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") of 2020. As of December 31, 2021, the Company had $39.0 million in remaining PPP loans which have been
excluded from the above SBA 7A Loan program table.
At December 31, 2022 and December 31, 2021, there were remaining unaccreted discounts on the retained portion
of sold SBA loans amounting to $4.3 million and $6.0 million respectively.
At December 31, 2022 and December 31, 2021, loans in the amount of $5.3 billion and $4.3 billion, respectively,
were pledged as collateral for certain borrowings. Refer to Note 9 for further discussion.
Total loans at December 31, 2022 and 2021 included loans to executive officers and directors of the Company, and
their associates, totaling approximately $6.0 million and $0.6 million, respectively. There were six new loans and
advances totaling approximately $5.5 million on those loans in 2022 and repayments amounted to $0.1 million.
Management does not believe these loans involve more than the normal risk of collectability or present other
unfavorable features.
For acquisitions completed prior to the Company's adoption of CECL, loans designated as PCI loans were
reclassified as PCD loans, upon the adoption of CECL. Activity in the accretable yield for PCI loans under the
Incurred Loss methodology used by the Company prior to adopting CECL was not material for the year ended
December 31, 2020.
As of December 31, 2022 and 2021, unamortized discounts on all acquired loans totaled $11.6 million and $17.2
million, respectively. Loan discounts are generally amortized as yield adjustments over the respective lives of the
loans, while the loans perform.
78
Nonperforming assets, defined as nonaccrual loans, troubled debt restructurings, loans past due 90 or more days
and still accruing interest, and foreclosed real estate, are summarized as follows:
($ 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,
2022
December 31,
2021
$
28,514
9,121
—
37,635
658
$
38,293
34,696
13,866
1,004
49,566
3,071
52,637
At December 31, 2022 and 2021, the Company had $0.8 million and $1.5 million in residential mortgage loans in
process of foreclosure, respectively.
At December 31, 2022, there was one loan with an immaterial commitment to lend additional funds to borrowers
whose loans were nonperforming. At December 31, 2021, there were no commitments to lend additional funds to
debtors whose loans were nonperforming.
The following table is a summary of the Company’s nonaccrual loans by major categories for the year ended
December 31, 2022.
($ 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
Nonaccrual
Loans with No
Allowance
Nonaccrual
Loans with an
Allowance
Total
Nonaccrual
Loans
$
$
3,855
—
157
—
5,010
—
9,022
6,374
1,009
3,132
1,397
7,495
85
19,492
10,229
1,009
3,289
1,397
12,505
85
28,514
The following table is a summary of the Company’s nonaccrual loans by major categories for 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
Nonaccrual
Loans with No
Allowance
Nonaccrual
Loans with an
Allowance
Total
Nonaccrual
Loans
$
$
3,947
495
858
—
7,648
—
12,948
8,205
137
4,040
694
8,583
89
21,748
12,152
632
4,898
694
16,231
89
34,696
There is no interest income recognized during the periods presented 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.
79
The following table represents the accrued interest receivables written off by reversing interest income for the
periods indicate.
($ 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
Year Ended
December 31, 2022
102
$
16
45
20
139
2
324
$
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, 2022.
($ 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
$
438
565
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
238
1,687
3,415
25
457
620
249
371
97
66
Total
$
5,417
2,811
Unamortized net deferred loan fees
Total loans
—
—
—
—
—
—
—
10,229
630,709
641,941
1,009
931,242
934,176
3,289
1,189,056
1,195,785
1,397
321,501
323,726
12,505
85
28,514
3,497,039
60,259
3,510,261
60,659
6,629,806
6,666,548
(1,403)
$ 6,665,145
80
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2021.
($ in thousands)
Accruing
30-59 Days
Past Due
Accruing 60-
89 Days
Past Due
Accruing 90
Days or More
Past Due
Nonaccrual
Loans
Accruing
Current
Total Loans
Receivable
Commercial, financial, and
agricultural
$
377
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) costs
Total loans
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
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
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
$350,000 in size that management of the Company designates as having higher risk. These loans do not share
common risk characteristics and are not included within the collectively evaluated loans for determining the
allowance for credit losses.
The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2022.
($ in thousands)
Residential
Property
Business
Assets
Land
Commercial
Property
Commercial, financial, and agricultural
$
—
6,394
Real estate mortgage – residential (1-4 family) first
mortgages
Real estate mortgage – commercial and other
Total
157
—
157
$
—
—
6,394
—
—
—
—
—
—
6,723
6,723
Total
Collateral-
Dependent
Loans
6,394
157
6,723
13,274
The following table presents an analysis of collateral-dependent loans of the Company as of 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 – commercial and other
Total
Residential
Property
Business
Assets
Land
Commercial
Property
$
$
—
—
871
—
871
7,886
—
—
—
7,886
—
533
—
—
533
—
—
—
10,743
10,743
Total
Collateral-
Dependent
Loans
7,886
533
871
10,743
20,033
81
Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the ACL
based on the fair value of collateral. The ACL 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% to 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
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 tables presents the activity in the ACL on loans for the periods indicated. The increase in ACL at
December 31, 2022 as compared to the prior year was related to a combination of the allowance required for loan
growth during the year, and updated economic forecasts and loss driver inputs to the CECL model. Throughout
2022, the economic forecasts have projected general weakening of the economy demonstrated by higher projected
unemployment rates, lower GDP, and declining price indices for both commercial real estate and residential
mortgages. These worsening economic projections translated to higher forecasted life of loan losses in our portfolio
and a higher estimated ACL.
($ 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
As of and for the year ended December 31, 2022
Beginning balance
$
16,249
16,519
Charge-offs
Recoveries
Provisions/(Reversals)
(2,519)
756
3,232
Ending balance
$
17,718
—
480
(1,871)
15,128
8,686
—
17
2,651
11,354
4,337
(43)
600
(1,736)
3,158
30,342
(1,063)
1,983
9,447
40,709
2,656
(840)
207
877
2,900
78,789
(4,465)
4,043
12,600
90,967
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
Commercial,
Financial, and
Agricultural
($ in thousands)
Consumer
loans
Unallocated
Total
As of and for the year ended December 31, 2021
Beginning balance
$
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
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
82
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2020
under the Incurred Loss methodology.
($ in thousands)
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
Commercial,
Financial, and
Agricultural
Consumer
loans
Unallo-
cated
Total
As of and for the year ended December 31, 2020
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
Collectively evaluated for
impairment
Purchased credit impaired
$
3,546
30
800
—
2,175
—
—
6,551
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
Unamortized net deferred
loan fees
Total loans
$ 782,549
570,672
972,378
306,256
2,049,203
53,955
—
4,735,013
(3,698)
4,731,315
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
—
36,281
774,712
569,845
958,848
306,141
2,026,682
53,913
—
4,690,141
Purchased credit impaired
137
150
4,227
100
3,939
38
—
8,591
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.
83
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.
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 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 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:
84
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, 2022. Acquired loans are presented in the year originated, not in the
year of acquisition.
($ in thousands)
2022
Commercial, financial, and agricultural
Term Loans by Year of Origination
2021
2020
2019
2018
Prior
Revolving
Total
Pass
Special Mention
Classified
$ 185,167
342
734
107,747
166
1,909
85,110
648
808
51,274
1,312
1,384
590
—
—
76,588
990
5,762
120,590
332
488
627,066
3,790
11,085
Total commercial, financial,
and agricultural
186,243
109,822
86,566
53,970
590
83,340
121,410
641,941
Real estate – construction, land development & other land loans
42,421
3,679
38
Pass
Special Mention
Classified
550,752
5,128
656
267,096
5
107
30,973
—
899
—
—
—
12,722
100
44
19,519
13
24
923,483
8,925
1,768
Total real estate –
construction, development
& other land loans
556,536
267,208
46,138
31,872
—
12,866
19,556
934,176
Real estate mortgage – residential (1-4 family) first mortgages
Pass
Special Mention
Classified
317,282
1,189
763
274,756
127
251
186,102
110
221
98,559
470
359
185
—
—
301,885
2,416
9,072
1,379
—
659
1,180,148
4,312
11,325
Total real estate mortgage
– residential (1-4 family)
first mortgages
319,234
275,134
186,433
99,388
185
313,373
2,038
1,195,785
Real estate mortgage – home equity loans/lines of credit
Pass
Special Mention
Classified
Total real estate mortgage
– home equity loans/lines
of credit
869
175
106
1,091
—
156
349
—
94
237
—
87
—
—
—
2,020
18
213
309,786
1,072
7,453
314,352
1,265
8,109
1,150
1,247
443
324
—
2,251
318,311
323,726
Real estate mortgage – commercial and other
Pass
Special Mention
Classified
1,096,643
1,186,678
569,624
247,448
179
324,361
48,882
3,473,815
1,715
3,480
1,114
1,265
4,436
84
8,289
2,456
—
—
4,457
8,118
665
367
20,676
15,770
Total real estate mortgage
– commercial and other
Consumer loans
1,101,838
1,189,057
574,144
258,193
179
336,936
49,914
3,510,261
Pass
Special Mention
Classified
35,406
7,946
3,610
1,056
—
320
—
31
—
3
—
1
Total consumer loans
35,726
7,977
3,613
1,057
3
—
—
3
1,250
10,953
60,224
—
25
—
55
—
435
1,275
11,008
60,659
Total
$ 2,200,727
1,850,445
897,337
444,804
957
750,041
522,237
6,666,548
Unamortized net deferred loan fees
Total loans
(1,403)
$ 6,665,145
At December 31, 2022, as derived from the table above, the Company had $39.0 million in loans graded as Special
Mention and $48.5 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. Revolving lines of credit that converted to term loans during the year ended December 31,
2022 amounted to $3.3 million.
85
The following table presents the Company’s recorded investment in loans by credit quality indicators by year of
origination or renewal as of December 31, 2021. Acquired loans are presented in the year originated, not in the
year of acquisition.
($ in thousands)
2021
2020
2019
2018
2017
Prior
Revolving
Total
Term Loans by Year of Origination
Commercial, financial, and agricultural
Pass
Special Mention
Classified
$ 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
Total commercial, financial,
and agricultural
206,779
140,588
74,385
76,470
16,745
17,597
116,433
648,997
Real estate – construction, land development & other land loans
69,066
5,095
47
Pass
Special Mention
Classified
573,613
41
1,541
133,888
737
49
12,455
110
83
9,764
104
14
8,190
2
4
13,737
9
—
820,713
6,098
1,738
Total real estate –
construction, development
& other land loans
575,195
134,674
74,208
12,648
9,882
8,196
13,746
828,549
Real estate mortgage – residential (1-4 family) first mortgages
Pass
Special Mention
Classified
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
Total real estate mortgage
– residential (1-4 family)
first mortgages
242,926
225,388
121,148
83,945
87,050
249,433
12,076
1,021,966
Real estate mortgage – home equity loans/lines of credit
Pass
Special Mention
Classified
Total real estate mortgage
– home equity loans/lines
of credit
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
Real estate mortgage – commercial and other
Pass
Special Mention
Classified
Total real estate mortgage
– commercial and other
Consumer loans
Pass
Special Mention
Classified
1,328,156
796,992
355,885
211,118
197,165
197,659
66,104
3,153,079
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
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. Revolving lines of credit that converted to term loans during the year ended December 31,
2021 amounted to $1.0 million.
86
Troubled Debt Restructurings
The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii)
the creditor has granted a concession. Concessions may include interest rate reductions or below market interest
rates, principal forgiveness, extension of terms and other actions intended to minimize potential losses.
The vast majority of the Company’s TDRs modified during the years ended December 31, 2022, 2021, and 2020
related to interest rate reductions combined with extension of terms. The Company does not generally grant
principal forgiveness.
The Company’s TDRs can be classified as either nonaccrual or accruing based on the loan’s payment status. The
TDRs that are nonaccrual are reported within the nonaccrual loan totals presented previously.
The following table presents information related to loans modified in a TDR during the year ended December 31,
2022.
($ in thousands, except number of contracts)
TDRs – Accruing
Commercial, financial, and agricultural
Real estate – construction, land development & other land loans
Real estate mortgage – residential (1-4 family) first mortgages
TDRs – Nonaccrual
Commercial, financial, and agricultural
Real estate mortgage – residential (1-4 family) first mortgages
Real estate mortgage – commercial and other
Total TDRs arising during period
For the year ended December 31, 2022
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
2 $
1
2
5
1
1
143
67
75
744
36
72
143
67
78
744
36
72
12 $
1,137
1,140
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
Real estate mortgage – residential (1-4 family) first mortgages
1 $
33
33
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 – commercial and other
Total TDRs arising during period
5
1
1
4
12 $
1,438
75
263
1,729
3,538
1,435
75
263
1,729
3,535
87
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
Commercial, financial, and agricultural
Real estate – construction, land development & other land loans
Real estate mortgage – residential (1-4 family) first mortgages
Consumer loans
TDRs – Nonaccrual
Commercial, financial, and agricultural
Real estate mortgage – commercial and other
Total TDRs arising during period
For the year ended December 31, 2020
Number
of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
2 $
143
1
2
1
1
5
12 $
67
75
4
72
5,977
6,338
143
67
78
4
72
5,977
6,341
Accruing TDRs that were modified in the previous 12 months and that defaulted during the years ended
December 31, 2022, 2021, and 2020 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, 2022
For the Year Ended
December 31, 2021
For the Year Ended
December 31, 2020
Number
of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Number
of
Contracts
Recorded
Investment
— $
— $
—
—
— $
— $
—
—
1 $
274
1 $
274
($ in thousands)
Accruing TDRs that subsequently defaulted
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 90% of the Company's loan portfolio is secured by real estate and is therefore
susceptible to changes in real estate valuations.
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 $13.3 million and
$13.5 million at December 31, 2022 and December 31, 2021, respectively, is separately classified on the
consolidated balance sheets within the line items "Other Liabilities."
88
The following table presents the balance and activity in the allowance for credit losses for unfunded loan
commitments for each period indicated.
($ in thousands)
Beginning balance
Adjustments for implementation of CECL on January 1, 2021
Day 2 provision for credit losses on unfunded commitments acquired from Select
(Reversal of) provision for credit losses on changes in unfunded commitments
Ending balance
December 31,
2022
December 31,
2021
$
$
13,506 $
—
—
(200)
13,306 $
582
7,504
3,982
1,438
13,506
Allowance for Credit Losses - Securities HTM and AFS
The ACL for securities HTM and AFS was immaterial at December 31, 2022 and December 31, 2021.
Note 5. Premises and Equipment
Premises and equipment at December 31, 2022 and 2021 consisted of the following:
($ in thousands)
Land
Buildings
Furniture and equipment
Leasehold improvements
Total cost
Less accumulated depreciation and amortization
Total premises and equipment
Estimated Useful Lives
2022
2021
15 to 40 years
5 to 10 years
5 to 39 years
$
45,363
114,884
33,147
1,644
45,398
112,622
31,099
2,028
195,038
191,147
(60,851)
(55,055)
$
134,187
136,092
Depreciation expense amounted to $6.9 million, $6.2 million, and $5.8 million for the years ended December 31,
2022, 2021, and 2020, respectively, and is recorded in occupancy expense.
Note 6. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible
assets as of December 31, 2022 and December 31, 2021 and the carrying amount of unamortizable intangible
assets as of those same dates.
($ in thousands)
Amortizable intangible assets:
Customer lists
Core deposit intangibles
SBA servicing asset
Other
Total
Unamortizable intangible assets:
Goodwill
December 31, 2022
December 31, 2021
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
$
2,700
29,050
13,264
100
45,114
1,847
21,274
9,260
58
32,439
2,700
29,050
11,932
100
43,782
1,386
18,076
6,460
33
25,955
$
364,263
364,263
Customer lists are generally amortized over five years and core deposit intangibles are generally amortized over 10
years, both at an accelerated rate.
89
Amortization expense of all other intangible assets, excluding the SBA servicing asset, totaled $3.7 million, $3.5
million, and $4.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.
SBA guarantee servicing fees and SBA servicing asset amortization expense are both recorded within noninterest
income within the line item "Other service charges, commissions, and fees." The following table presents the
changes in the SBA servicing assets for each period indicated. Impairment charges included with amortization
expense in the table below were immaterial for each period presented.
($ in thousands)
Beginning balance, net
New servicing assets
Amortization expense and impairment charges
Ending balance, net
December 31,
2022
December 31,
2021
$
$
5,472
1,332
(2,800)
4,004
5,788
1,956
(2,272)
5,472
During 2022, 2021, and 2020, the Company recorded $3.4 million, $3.9 million, and $3.3 million, respectively, in
SBA guarantee servicing fee income. At December 31, 2022 and 2021, the Company serviced SBA for others
totaling $392.4 million and $414.2 million, respectively. There were no other loans serviced for others in any year
presented.
Goodwill is evaluated for impairment on at least an annual basis, with the annual evaluation occurring as of October
31st of each year. Goodwill is also evaluated for impairment any time there is a triggering event indicating that
impairment may have occurred. No triggering events were identified during 2022 or 2021, and therefore, the
Company did not perform interim impairment evaluations in either of those years. Each of the Company's goodwill
impairment evaluations for the periods presented, including the most recent October 2022 evaluation, indicated that
there was no goodwill impairment.
The following table presents the changes in carrying amounts of goodwill:
($ in thousands)
Balance at December 31, 2020
Additions from acquisition of Select
Reduction from disposal of First Bank Insurance
Balance at December 31, 2021
Net activity during 2022
Balance at December 31, 2022
Total Goodwill
239,272
132,356
(7,365)
364,263
—
364,263
$
$
In addition to the changes in goodwill presented above, activity for other intangibles related to transactions since
January 1, 2021 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, customer lists with a carrying value of $2.8 million were
derecognized.
90
The following table presents the estimated amortization expense schedule related to acquisition-related amortizable
intangible assets for each of the five calendar years ending December 31, 2027 and the estimated amount
amortizable thereafter. These amounts will be recorded as "Intangibles amortization expense" within the noninterest
expense section of the consolidated statements of income. These estimates are subject to change in future periods
to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful
lives of amortizable intangible assets.
($ in thousands)
2023
2024
2025
2026
2027
Thereafter
Total
Note 7. Income Taxes
Estimated
Amortization Expense
$
$
2,545
1,718
1,358
962
781
1,307
8,671
The components of income tax expense for the years ended December 31, 2022, 2021, and 2020 are as follows:
($ in thousands)
Current
- Federal
- State
Deferred
- Federal
- State
Total
2022
2021
2020
$
35,616
4,477
(1,658)
(152)
$
38,283
25,742
3,733
(4,247)
(553)
24,675
27,799
3,909
(8,893)
(1,161)
21,654
The following is a reconciliation of federal income tax expense at the statutory rate of 21% at December 31, 2022,
December 31, 2021, and December 31, 2020, 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 and other 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
Other, net
Total
2022
2021
2020
$
38,896
25,266
21,657
(1,976)
(669)
(1,511)
26
3,369
107
(20)
61
(1,589)
(1,229)
(589)
14
2,472
242
(10)
98
(1,050)
(772)
(532)
23
2,117
—
(20)
231
$
38,283
24,675
21,654
91
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets,
which are included in Other Assets on the consolidated balance sheets, are as follows at December 31, 2022 and
2021:
($ 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
Basis differences in assets acquired in FDIC transactions
Trust preferred securities
Pension
Gross deferred tax liabilities
Net deferred tax asset
2022
2021
$
20,900
3,057
365
638
197
4,404
—
102,046
3
—
2,982
768
652
151
77
—
136,240
(30)
136,210
(3,102)
(5,493)
(10,047)
(108)
(416)
(12)
(19,178)
$
117,032
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)
20,634
The valuation allowances for 2022, 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 2019. There are no indications of any material adjustments relating to any examination currently being
conducted by any taxing authority.
Retained earnings at December 31, 2022, 2021 and 2020 included approximately $6.9 million representing
pre-1988 tax bad debt reserve base year amounts for which no deferred income tax liability has been provided
since these reserves are not expected to reverse or may never reverse. Circumstances that would require an
accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of
1987, failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits,
or other distributions in dissolution, liquidation or redemption of the Bank’s stock.
92
Note 8. Deposits
The following table lists the composition of the deposit portfolio as of the end of the respective years.
($ in thousands)
Noninterest-bearing checking accounts
Interest-bearing checking accounts
Money market accounts
Savings accounts
Other time deposits
Time deposits of $250,000 or more
Total deposits
December 31, 2022 December 31, 2021
$
3,566,003
1,514,166
2,416,146
728,641
726,254
276,319
3,348,622
1,593,231
2,562,283
708,054
555,084
357,355
$
9,227,529 $
9,124,629
At December 31, 2022, the scheduled maturities of time deposits were as follows:
($ in thousands)
2023
2024
2025
2026
2027
Thereafter
$
882,741
61,393
27,906
17,565
12,084
884
$ 1,002,573
Deposits received from executive officers and directors and their associates totaled approximately $2.0 million and
$2.5 million at December 31, 2022 and 2021, respectively.
Deposit overdrafts of approximately $0.8 million and $0.9 million at December 31, 2022 and 2021 are included
within "Loans" on the consolidated balance sheets.
As of December 31, 2022 and 2021, the Company held $276.3 million and $357.4 million, respectively, in time
deposits of more than $250,000 (which was the FDIC insurance limit for insured deposits as of December 31,
2022). Brokered deposits were $261.9 million and $7.4 million at December 31, 2022 and 2021, respectively. Total
reciprocal deposits through the Certificate of Deposit Account Registry Services ("CDARS") and Insured Cash
Sweep ("ICS") were $10.3 million and $12.6 million at December 31, 2022 and 2021, respectively.
93
Note 9. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31, 2022
and 2021 (dollars are in thousands):
Call Feature
2022 Amount
Interest Rate
32
912
214
38
158
159
329
40,000
50,000
50,000
80,000
20,620
25,774
10,310
1.00% fixed
1.25% fixed
0.25% fixed
0.00% fixed
1.00% fixed
1.00% fixed
0.50% fixed
4.57% fixed
4.15% fixed
4.35% fixed
4.25% fixed
7.12% at 12/31/22
adjustable rate
3 month LIBOR +
2.70%
6.16% at 12/31/22
adjustable rate
3 month LIBOR +
1.39%
6.08% at 12/31/22
adjustable rate
3 month LIBOR
+2.00%
6.90% at 12/31/22
adjustable rate
3 month LIBOR +
2.15%
4.82%
12,372
290,918
(3,411)
$
287,507
Description – 2022
FHLB Principal Reducing Credit
Due date
7/24/2023
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
FHLB Daily Rate Credit
FHLB Fixed Rate Credit
FHLB Fixed Rate Credit
FHLB Fixed Rate Credit
6/26/2028
7/17/2028
8/18/2028
8/22/2028
12/20/2028
8/23/2023
1/9/2023
2/9/2023
2/1/2023
$
None
None
None
None
None
None
None
None
None
None
None
Trust Preferred Securities
1/23/2034
Trust Preferred Securities
6/15/2036
Trust Preferred Securities
1/7/2035
Quarterly by Company
beginning 1/23/2009
Quarterly by Company
beginning 6/15/2011
Quarterly by Company
beginning 1/7/2010
Trust Preferred Securities
Total borrowings / weighted average rate as of December 31, 2022
9/20/2034
Quarterly by Company
beginning 9/20/2009
Unamortized discount on acquired borrowings
Total borrowings
94
The following table presents information regarding the Company’s outstanding borrowings at December 31, 2021
(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
2.91% 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%
2.27% at 12/31/21
adjustable rate
3 month LIBOR +
2.15%
2.24%
All outstanding FHLB borrowings may be accelerated immediately by the FHLB in certain circumstances, including
material adverse changes in the condition of the Company or if the Company’s qualifying collateral amounts to less
than that required under the terms of the FHLB borrowing agreement.
In the above tables, at December 31, 2022 short-term borrowings (original maturity terms of less than 3 months)
totaled $220.0 million. There were no short-term borrowings at December 31, 2021.
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%.
95
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
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, 2022, the Company had three sources of readily available borrowing capacity:
•
•
•
An $847.1 million line of credit with the FHLB that 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. $221.8 million was outstanding at
December 31, 2022 and $2.0 million was outstanding at December 31, 2021;
A total of $265.0 million federal funds lines of credit with correspondent banks which allow the Company to
purchase federal funds on an overnight, unsecured basis. None was outstanding at December 31, 2022 or
2021; and
An approximately $165.4 million line of credit through the Federal Reserve discount window, and is secured
by a blanket lien on a portion of the Company’s commercial and consumer loan portfolio (excluding real
estate collateral). None was outstanding at December 31, 2022 or 2021.
Note 10. Leases
The Company enters into leases in the normal course of business. As of December 31, 2022, the Company leased
16 branch offices for which the land and buildings are leased and nine branch offices for which the land is leased
but the building is owned. The Company also leases 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 July 2023 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 19.6 years as of December 31, 2022. 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 2.97% as of December 31, 2022.
The right-of-use assets and lease liabilities were $18.7 million and $19.4 million as of December 31, 2022,
respectively, and were $20.7 million and $21.2 million as of December 31, 2021, respectively.
Total operating lease expense charged to operations under all operating lease agreements was $2.9 million in 2022,
$2.6 million in 2021, and $2.9 million in 2020.
96
Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31,
2022 for each of the five calendar years ending December 31, 2027 are as follows:
($ in thousands)
2023
2024
2025
2026
2027
Thereafter
Total undiscounted lease payments
Less effect of discounting
$
2,360
2,163
1,706
1,685
1,547
18,441
27,902
(8,511)
Present value of estimated lease payments (lease liability)
$
19,391
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 $4.9 million, $4.3 million, and
$4.3 million for the years ended December 31, 2022, 2021, and 2020, respectively. Although discretionary
contributions by the Company are permitted by the plan, the Company did not make any such contributions in the
years presented. The Company’s matching and discretionary contributions are made according to the same
investment elections each participant has established for their deferral contributions.
Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the “Pension
Plan”) that qualified under Section 401(a) of the IRC. The Pension Plan provided for a monthly payment, at normal
retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual Compensation (five
highest consecutive calendar years’ earnings out of the last ten years of employment) multiplied by the employee’s
years of service not in excess of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of the
average social security wage base multiplied by years of service not in excess of 35 years. Benefits were fully
vested after five years of service. Effective December 31, 2012, the Company froze the Pension Plan for all
participants.
The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants
and are intended to be deductible for income tax purposes. As discussed below, the contributions are invested to
provide for benefits under the Pension Plan. The Company did not make any contributions to the Pension Plan for
any of the years presented. The Company also does not expect to contribute to the Pension Plan in 2023.
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between the
two amounts representing the funded status of the Pension Plan as of the end of the respective year.
97
($ in thousands)
Change in benefit obligation
2022
2021
2020
Benefit obligation at beginning of year
$
41,657
44,750
41,592
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Accumulated 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
—
1,043
(10,286)
(1,803)
30,611
44,904
(9,446)
—
(1,803)
33,655
—
981
(2,041)
(2,033)
41,657
48,167
(1,230)
—
(2,033)
44,904
—
1,223
3,788
(1,853)
44,750
43,824
6,196
—
(1,853)
48,167
Funded status at end of year
$
3,044
3,247
3,417
The amount recognized in the Other Assets in the consolidated balance sheets at December 31, 2022 and 2021 as
it relates to the Pension Plan, excluding the related deferred tax assets, was $3.0 million and $3.2 million.
The following table presents information regarding the amounts recognized in accumulated other comprehensive
income (loss) (“AOCI”) at December 31, 2022 and 2021, as it relates to the Pension Plan.
($ in thousands)
Net loss
Prior service cost
Amount recognized in AOCI before tax effect
Tax benefit
Net amount recognized as decrease to AOCI
2022
2021
$
(1,497)
(1,441)
—
—
(1,497)
(1,441)
344
331
$
(1,153)
(1,110)
The following table reconciles the beginning and ending balances of AOCI at December 31, 2022 and 2021, as it
relates to the Pension Plan:
($ in thousands)
Accumulated other comprehensive loss at beginning of fiscal year
Net loss arising during period
Amortization of unrecognized actuarial loss
Tax expense (benefit) of changes during the year, net
2022
2021
$
(1,110)
(1,364)
(312)
256
13
(247)
577
(76)
Accumulated other comprehensive loss at end of fiscal year
$
(1,153)
(1,110)
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
2022
2021
$
4,689
(147)
—
$
4,542
5,188
(499)
—
4,689
98
Net pension cost for the Pension Plan included the following components for the years ended December 31, 2022,
2021, and 2020:
($ in thousands)
2022
2021
2020
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
1,043
(1,152)
256
147
$
—
981
(1,059)
577
499
—
1,223
(1,300)
843
766
The following table is an estimate of the benefits that will be paid in accordance with the Pension Plan for each of
the five calendar years ending December 31, 2027 and thereafter, assuming the Pension Plan is operated on an
ongoing basis.
($ in thousands)
2023
2024
2025
2026
2027
2028-2032
$
Estimated
benefit payments
1,932
1,973
2,035
2,069
2,109
10,728
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 Pension 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, 2022, by asset category, were as follows:
($ in thousands)
Cash and cash equivalents
Fixed income investment funds
Total
Total Fair Value at
December 31,
2022
$
$
194
33,461
33,655
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
194
33,461
33,655
—
—
—
99
Table of Contents
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
Fixed income investment funds
Total
Total Fair Value at
December 31,
2021
$
$
267
44,637
44,904
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
—
—
—
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, 2022 and 2021.
-
-
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
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Accumulated benefit obligation at end of year
Plan assets
Funded status at end of year
2022
2021
2020
$
4,660
—
112
5,982
—
119
(1,006)
(1,119)
(245)
3,521
—
(322)
4,660
—
5,638
—
158
517
(331)
5,982
—
$
(3,521)
(4,660)
(5,982)
The amount recognized in the Other Liabilities in the consolidated balance sheets at December 31, 2022 and 2021
as it relates to the SERP, excluding the related deferred tax assets, was $3.5 million and $4.7 million.
100
The following table presents information regarding the amounts recognized in AOCI at December 31, 2022 and
2021, as it relates to the SERP:
($ in thousands)
Net gain
Prior service cost
Amount recognized in AOCI before tax effect
Tax expense
Net amount recognized as increase to AOCI
2022
2021
$
1,551
—
1,551
(356)
1,195
$
1,088
—
1,088
(250)
838
The following table reconciles the beginning and ending balances of AOCI at December 31, 2022 and 2021, as it
relates to the SERP:
($ in thousands)
2022
2021
Accumulated other comprehensive income (loss) at beginning of fiscal year
Net gain arising during period
Prior service cost
Amortization of unrecognized actuarial (loss) gain
Amortization of prior service cost and transition obligation
Tax expense related to changes during the year, net
Accumulated other comprehensive income at end of fiscal year
$
$
838
1,007
—
(544)
—
(106)
1,195
(35)
1,119
—
15
—
(261)
838
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
2022
2021
$
(5,748)
(5,936)
432
245
(134)
322
$
(5,071)
(5,748)
Net pension cost for the SERP included the following components for the years ended December 31, 2022, 2021,
and 2020:
($ in thousands)
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Net amortization and deferral
Net periodic pension cost
2022
2021
2020
$
$
—
112
(544)
(432)
—
119
15
134
—
158
(157)
1
The following table is an estimate of the benefits that will be paid in accordance with the SERP for each of the five
calendar years ending December 31, 2027 and thereafter:
($ in thousands)
2023
2024
2025
2026
2027
2028-2032
101
Estimated
benefit
payments
$
240
237
275
277
295
1,345
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, 2022, 2021, and 2020:
2022
2021
2020
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
2.62%
2.48%
2.24%
2.04%
3.03%
2.89%
4.94%
4.90%
2.62%
2.48%
2.24%
2.04%
2.62%
n/a
2.24%
n/a
3.03%
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
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, 2022 and December 31,
2021.
($ in thousands)
Loan commitments
Unused lines of credit
Total
December 31, 2022
December 31, 2021
Fixed Rate
Variable
Rate
Total
Fixed Rate
Variable
Rate
Total
$ 681,486
211,071
892,557
389,758
230,521
620,279
273,244
1,194,575
1,467,819
273,693
1,176,803
1,450,496
$ 954,730
1,405,646
2,360,376
663,451
1,407,324
2,070,775
At December 31, 2022 and 2021, the Company had $20.2 million and $21.3 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.
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, 2022, the Company had a remaining funding
commitments of $28.6 million related to these investments.
See Note 10 with respect to future obligations under operating leases and Note 11 with respect to future benefits
that will be paid under the Company's Pension Plan and SERP.
The Company, in the normal course of business, may be subject to various pending and threatened lawsuits in
which claims for monetary damages are asserted. The Company is not involved in any legal proceedings which, in
management’s opinion, could have a material effect on the consolidated financial position of the Company.
102
Note 13. Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal and most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions
that market participants would use in pricing an asset or liability.
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2022.
Fair Value at
December 31,
2022
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs
(Level 3)
Description of Financial Instruments ($ in thousands)
Recurring
Securities available for sale:
US Treasury securities
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
Total available for sale securities
Presold mortgages in process of settlement
Nonrecurring
Individually evaluated loans
Foreclosed real estate
$
168,758
57,456
2,045,000
43,279
2,314,493
$
$
$
—
—
—
—
—
168,758
57,456
2,045,000
43,279
2,314,493
1,282
1,282
9,590
38
—
—
—
—
—
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
Total available for sale securities
Presold Mortgages in process of settlement
Nonrecurring
Impaired loans
Foreclosed real estate
$
$
$
2,514,805
46,430
2,630,414
—
—
—
—
69,179
2,514,805
46,430
2,630,414
19,257
19,257
11,583
364
—
—
—
—
—
103
—
—
—
—
—
—
9,590
38
—
—
—
—
—
11,583
364
The following is a description of the valuation methodologies used for instruments measured at fair value.
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.
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.
104
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2022, the
significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Individually evaluated loans -
collateral-dependent
Individually evaluated loans -
cash-flow dependent
Fair Value at
December 31,
2022
Valuation
Technique
Significant Unobservable
Inputs
$
5,680 Appraised value Discounts applied for estimated costs
Range
(Weighted
Average)
10%
to sell
3,909 PV of expected
cash flows
Discount rates used in the calculation
of PV of expected cash flows
5.5% - 11.1%
(6.76%)
Foreclosed real estate
38 Appraised value Discounts applied for estimated costs
10%
to sell
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)
Impaired loans - valued at collateral
value
Impaired loans - valued at PV of
expected cash flows
Fair Value at
December 31,
2021
Valuation
Technique
Significant Unobservable
Inputs
$
7,326 Appraised value Discounts applied for estimated costs
4,257 PV of expected
cash flows
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 applied for estimated costs
10%
to sell
The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31,
2022 and 2021 are as follows:
($ in thousands)
December 31, 2022
December 31, 2021
Level in
Fair Value
Hierarchy
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Cash and due from banks, noninterest-bearing
Level 1 $
101,133
Due from banks, interest-bearing
Securities held to maturity
SBA and other 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 1
Level 2
Level 2
Level 3
Level 1
Level 1
Level 3
Level 2
Level 2
Level 1
169,185
541,700
—
101,133
169,185
432,528
—
128,228
332,934
513,825
61,003
128,228
332,934
511,699
62,004
6,574,178
6,240,870
6,002,926
5,990,235
29,710
164,592
4,004
29,710
164,592
4,721
25,896
165,786
5,472
25,896
165,786
5,546
9,227,529
9,218,945
9,124,629
9,124,701
287,507
277,146
2,738
2,738
67,386
607
61,295
607
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.
105
Note 14. Stock-Based Compensation
The Company recorded total stock-based compensation expense of $3.0 million, $2.3 million, and $2.5 million for
the years ended December 31, 2022, 2021, and 2020, respectively. The Company recognized $0.7 million, $0.5
million, and $0.6 million of income tax benefits related to stock-based compensation expense in its income
statement for the years ended December 31, 2022, 2021, and 2020, respectively.
At December 31, 2022, 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, 2022, the
Equity Plan had 348,087 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.
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 to each non-
employee director (currently 12 in total) in June of each year. These grants were each valued at approximately
$32,000 in 2022. Compensation expense associated with these director awards is recognized on the date of the
award since there are no vesting conditions. On June 1, 2022, the Company granted 10,344 shares of common
stock to non-employee directors (862 shares per director), at a fair market value of $37.12 per share, which was the
closing price of the Company’s common stock on that date, which resulted in $384,000 in expense. 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 $320,000 in expense. The expense associated with director grants is classified as "other
operating expense" in the consolidated statements of income.
106
The following table presents information regarding the activity during 2020, 2021, and 2022 related to the
Company’s outstanding restricted stock:
Nonvested at January 1, 2020
Granted during the period
Vested 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
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2022
Long-Term Restricted Stock
Shares
Grant Date
Fair Value
159,366 $
68,704
(55,965)
172,105
104,414
(63,369)
(6,819)
206,331
95,960
(70,110)
(9,169)
223,012
36.79
26.96
33.91
33.80
40.56
39.82
37.32
35.25
38.09
36.69
32.62
36.14
Total unrecognized compensation expense as of December 31, 2022 amounted to $4.7 million with a weighted
average remaining term of 2.1 years. The Company expects to record $2.5 million of compensation expense in the
next twelve months related to these nonvested awards that are outstanding at December 31, 2022.
Note 15. Shareholders’ Equity
Rabbi Trust Obligations
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 $6.1 million of the deferred compensation has been paid to the plan participants. The
balances of the related asset and liability were $1.6 million and $1.8 million at December 31, 2022 and
December 31, 2021, 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 2022, the Company did not repurchase any shares of the Company's common stock. The $40.0 million
repurchase authorization in effect during 2022 expired December 31, 2022 and the Company's Board has not
approved any additional repurchase authorizations.
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 $20 million repurchase authorization publicly
announced in November 2020, which expired on December 31, 2021.
107
Note 16. Earnings Per Share
The following is a reconciliation of the income (numerator) and shares (denominator) used in computing Basic and
Diluted Earnings Per Common Share ("EPS"):
2022
2021
2020
For Years Ended December 31,
($ in
thousands
except per
share
amounts)
Basic EPS:
Income
Shares
Per
Share
Amount
Income
Shares
Per
Share
Amount
Income
Shares
Per
Share
Amount
Net income
$ 146,936
$ 95,644
$ 81,477
Less:
income
allocated to
participating
securities
Basic EPS
per common
share
Diluted EPS:
(779)
(483)
(398)
$ 146,157
35,485,620 $ 4.12 $ 95,161
29,876,151 $ 3.19 $ 81,079
28,839,866 $ 2.81
Net income
$ 146,936
35,485,620
$ 95,644
29,876,151
$ 81,477
28,839,866
Effect of
Dilutive
Securities
Diluted EPS
per common
share
—
189,110
—
151,634
—
141,701
$ 146,936
35,674,730 $ 4.12 $ 95,644
30,027,785 $ 3.19 $ 81,477
28,981,567 $ 2.81
For the years ended December 31, 2022, 2021, and 2019, there were no options that were anti-dilutive.
Note 17. Accumulated Other Comprehensive (Loss) Income
The components of AOCI for the Company are as follows:
($ in thousands)
December 31,
2022
December 31,
2021
December 31,
2020
Unrealized (loss) gain on securities available for sale
$
(444,063)
Deferred tax asset (liability)
Net unrealized (loss) gain on securities available for sale
Postretirement plans asset (liability)
Deferred tax (liability) asset
Net postretirement plans asset (liability)
102,046
(342,017)
54
(12)
42
(32,067)
7,369
(24,698)
(353)
81
(272)
20,448
(4,699)
15,749
(1,817)
418
(1,399)
Total accumulated other comprehensive (loss) income
$
(341,975)
(24,970)
14,350
108
The following table discloses the changes in AOCI for the years ended December 31, 2022, 2021, and 2020 (all
amounts are net of tax).
($ in thousands)
Unrealized
Gain (Loss)
on Securities
Available for
Sale
Postretirement
Plans (Liability)
Asset
Total
Beginning balance at January 1, 2020
$
7,504
(2,381)
5,123
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income
14,425
(6,180)
8,245
454
528
982
14,879
(5,652)
9,227
Ending balance at December 31, 2020
15,749
(1,399)
14,350
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive (loss) income
(41,400)
953
(40,447)
671
456
(40,729)
1,409
1,127
(39,320)
Ending balance at at December 31, 2021
(24,698)
(272)
(24,970)
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive (loss) income
(317,319)
—
(317,319)
536
(222)
314
(316,783)
(222)
(317,005)
Ending balance at December 31, 2022
$
(342,017)
42
(341,975)
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 , net of taxes, and are recorded in the "Other operating expenses" line item of
the consolidated statements of income.
Note 18. 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, 2022, approximately $830.8 million of the Company’s investment in
the Bank was restricted as to transfer to the Company without obtaining prior regulatory approval.
There was no average reserve balance requirement under the requirements of the Federal Reserve at
December 31, 2022.
The Company and the Bank must comply with regulatory capital requirements established by the Federal Reserve.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and
Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
The Company’s and the Bank’s respective regulatory capital ratios as of December 31, 2022 and 2021, along with
the minimum amounts required for capital adequacy purposes and to be well capitalized under prompt corrective
109
action in effect at such times are presented below. There are no conditions or events since year-end that
management believes have changed the Company’s or the Bank's classification.
($ 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, 2022
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, 2021
Common Equity Tier I Capital Ratio
Company
Bank
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
$ 1,010,369
1,077,526
13.02 %
13.88 %
543,403
543,301
7.00 %
7.00 %
N/A
N/A
504,494
6.50 %
1,171,084
1,174,634
15.09 %
15.13 %
815,104
814,951
10.50 %
10.50 %
N/A
N/A
776,144
10.00 %
1,073,958
1,077,526
13.83 %
13.88 %
659,846
659,723
1,073,958
1,077,526
10.51 %
10.55 %
408,623
408,569
8.50 %
8.50 %
4.00 %
4.00 %
N/A
N/A
620,915
8.00 %
N/A
N/A
510,712
5.00 %
$
888,936
934,687
12.53 %
13.18 %
496,635
496,285
7.00 %
7.00 %
N/A
N/A
460,836
6.50 %
1,040,964
1,023,354
14.67 %
14.43 %
744,953
744,427
10.50 %
10.50 %
N/A
N/A
708,979
10.00 %
952,272
934,687
13.42 %
13.18 %
603,057
602,632
952,272
934,687
9.39 %
9.22 %
405,790
405,652
8.50 %
8.50 %
4.00 %
4.00 %
N/A
N/A
567,183
8.00 %
N/A
N/A
507,065
5.00 %
110
Note 19. 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, 2022, 2021, and 2020. Items outside the scope of
ASC 606 are noted as such.
($ in thousands)
Noninterest income in-scope of ASC 606:
Service charges on deposit accounts
Other service charges, commissions, and fees:
Bankcard Interchange income, net
Other service charges and fees
Commissions from sales of insurance and financial products:
Insurance income
Wealth management income
SBA consulting fees
Noninterest income (in-scope of ASC 606)
Noninterest income (out-of-scope of ASC 606)
Total noninterest income
For the Years Ended December 31,
2022
2021
2020
$
15,523
12,317
11,098
14,996
5,683
—
5,195
2,608
44,005
23,980
$
67,985
17,323
4,352
2,725
4,160
7,231
48,108
25,503
73,611
13,101
3,905
5,353
3,495
8,644
45,596
35,750
81,346
A description of the Company’s revenue streams accounted for under ASC 606 is detailed below.
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based,
account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft
occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account
maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month,
representing the period over which the Company satisfies the performance obligation. Transaction-based fees,
which include services such as ATM 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
111
insurance company and the policyholder. The Company’s performance obligation was generally satisfied upon the
issuance of the insurance policy.
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.
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 20. Supplementary Income Statement Information
Components of other noninterest income or noninterest expense exceeding 1% of total revenue ($4.1 million) for
any of the years ended December 31, 2022, 2021, and 2020 are as follows:
($ in thousands)
Noninterest income:
2022
2021
2020
Other service charges, commissions, and fees – interchange fees, net
$
14,996
17,323
13,101
Noninterest expense:
Other operating expenses – software costs
Other operating expenses – data processing expense
Other operating expenses – credit card rewards expense
Note 21. 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
Total liabilities and shareholders’ equity
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Dividends from wholly-owned subsidiaries
Earnings of wholly-owned subsidiaries, net of dividends
Interest expense
All other expense, net
Net income
6,064
7,535
547
5,315
5,959
3,431
5,149
4,743
2,391
As of December 31,
2022
2021
$
5,611
18,625
1,100,829
1,279,285
7
22
7
5,056
$ 1,106,469
1,302,973
$
65,665
9,208
74,873
65,412
6,986
72,398
1,031,596
1,230,575
$ 1,106,469
1,302,973
Year Ended December 31,
2022
2021
2020
$
17,400
133,147
(2,672)
(939)
$
146,936
25,300
75,697
(1,455)
(3,898)
95,644
63,100
20,899
(1,743)
(779)
81,477
112
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
Operating Activities:
Net income
Equity in undistributed earnings of subsidiaries
Decrease in other assets
Increase (decrease) in other liabilities
Total – operating activities
Investing Activities:
Net cash received in acquisitions
Total - investing activities
Financing Activities:
Year Ended December 31,
2022
2021
2020
$
146,936
(133,147)
4,055
642
18,486
95,644
(75,697)
3,924
(859)
81,477
(20,899)
5,806
(3)
23,012
66,381
—
—
7,379
7,379
—
—
Payment of common stock cash dividends
(30,660)
(22,228)
(4,036)
(786)
(20,936)
(31,868)
(307)
(27,050)
(53,111)
3,341
15,284
18,625
13,270
2,014
15,284
Repurchases of common stock
Stock withheld for payment of taxes
Total - financing activities
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
—
(840)
(31,500)
(13,014)
18,625
$
5,611
113
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, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and
2021, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2022, 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, 2022, 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 February 28, 2023 expressed an
unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of
accounting for the recognition and measurement of credit losses as of January 1, 2021 due to the adoption of ASC
Topic 326, Financial Instruments - Credit Losses.
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 matter communicated below is a matter 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
114
communicating the critical audit matters below, providing separate opinions on the critical audit matter 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 $6.7 billion and related allowance for credit losses of approximately $91.0 million as of
December 31, 2022. 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
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:
•
•
•
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.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2019.
Raleigh, North Carolina
February 28, 2023
115
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,
2022, 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, 2022,
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, 2022 and 2021, the
related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2022, and the related notes and our report dated
February 28, 2023 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in 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.
116
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
February 28, 2023
117
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 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.
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, 2022.
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, 2022, and audited the Company’s effectiveness of
internal control over financial reporting as of December 31, 2022, as stated in their reports, which are 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 2022 that were reasonably likely to materially affect our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
118
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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,” “Board
Committees, Attendance and Compensation,” and "Pay Versus Performance" 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, 2022, 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, 2022 regarding shares of the Company’s stock that
may be issued pursuant to the Company’s equity-based compensation plan. At December 31, 2022, the Company
had no options, warrants or rights outstanding under any compensation plans.
As of December 31, 2022
(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))
— $
—
— $
—
—
—
348,087
—
348,087
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.
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.
119
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 (*).
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.
Merger Agreement between First Bancorp and GrandSouth Bancorporation dated June 21, 2022 was filed as Exhibit
2.1 to the Company's Current Report on Form 8-K filed on June 21, 2022, and is incorporated herein by reference.
Articles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through 3.a.v to the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and are incorporated herein by
reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibits 3.1 and 3.2 to the Company’s
Current Report on Form 8-K filed on January 13, 2009, and are incorporated herein by reference. Articles of
Amendment to the Articles of Incorporation were filed as Exhibit 3.1.b to the Company’s Registration Statement on
Form S-3D filed on June 29, 2010 (Commission File No. 333-167856), and are incorporated herein by reference.
Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed on September 6, 2011, and are incorporated herein by reference. Articles of Amendment to the Articles of
Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and
are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 99.1 to
the Company's Current Report on Form 8-K filed June 14, 2022, 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.
2.a
2.b
3.a
3.b
4.a
4.b
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 effective January 1, 2009 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. (*)
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
10.i
10.j
the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as is incorporated herein by
reference. (*)
First Bancorp Employees’ Pension Plan, including amendments, was filed as Exhibit 10.v to the Company's Annual
Report on Form 10-K for the year ended December 31, 2009, and is incorporated herein by reference. (*)
Employment Agreement between the Company and Richard H. Moore dated August 28, 2012 was filed as Exhibit 10.a
to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, and is incorporated
herein by reference. Amendments to this agreement were filed in the Company’s Current Reports on Form 8-K filed on
March 9, 2017 and February 9, 2018 and are incorporated herein by reference. (*)
120
10.k Amended and Restated Employment Agreement by and among the Company and the Bank and Michael G. Mayer
10.l
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. (*)
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 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.n 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.o 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.p 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.q 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.r 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
Consent of Independent Registered Public Accounting Firm, BDO USA, LLP
21
23
31.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101
The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31,
2022, 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.
121
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, FIRST BANCORP
has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Southern Pines, and State of North Carolina, on February 28, 2023.
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.
122
/s/ Richard H. Moore
Richard H. Moore
Chief Executive Officer &
Chairman of the Board
February 28, 2023
/s/ James C. Crawford, III
James C. Crawford, III
Lead Independent Director
Director
February 28, 2023
/s/ Mary Clara Capel
Mary Clara Capel
Director
February 28, 2023
/s/ Suzanne DeFerie
Suzanne DeFerie
Director
February 28, 2023
/s/ Abby J. Donnelly
Abby J. Donnelly
Director
February 28, 2023
/s/ Mason Y. Garrett
Mason Y. Garrett
Director
February 28, 2023
/s/ John B. Gould
John B. Gould
Director
February 28, 2023
/s/ Michael G. Mayer
Michael G. Mayer
Director
February 28, 2023
/s/ John W. McCauley
John W. McCauley
Director
February 28, 2023
Executive Officers
/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
February 28, 2023
February 28, 2023
Board of Directors
/s/ Richard H. Moore
Richard H. Moore
Chairman of the Board
Director
February 28, 2023
/s/ Carlie C. McLamb, Jr.
Carlie C. McLamb, Jr.
Director
February 28, 2023
/s/ Dexter V. Perry
Dexter V. Perry
Director
February 28, 2023
/s/ J. Randolph Potter
J. Randolph Potter
Director
February 28, 2023
/s/ O. Temple Sloan, III
O. Temple Sloan, III
Director
February 28, 2023
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
February 28, 2023
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
February 28, 2023
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
February 28, 2023
123