Accolades of note include:
A Top 10 Performing
Bank, according
to S&P Global
KBW’s 2023 Annual
Bank Honor Roll
Best Employer in
the Large Employer
Category by Business
NC Magazine
Corporate
Philanthropy
award winner by
the Triangle
Business Journal
Multiple local
“Best Bank” awards
throughout our
communities, including
Greenville (SC) as a top
bank for small business
To be named a “best
employer” in North Carolina
is one of the highest honors
we could receive, knowing
that our own team members
believe in our mission as
much as leadership does.
2023
Year In Review
Richard H. Moore
Chief Executive Offi cer
Dear Shareholders, Customers, and Friends,
The banking industry was certainly interesting in 2023, but through
it all, First Bank has persevered, maintained success, and upheld our
strong culture. This was especially true in March, when we completed
the conversion of the eight South Carolina branches and CarBucks
Floor Plan division from GrandSouth. The conversion went as
planned and each location fully assimilated into the First Bank brand
and culture. The teams did an excellent job working together to
make sure it was a seamless experience for our new customers.
We knew these efforts began to pay off when we began to
receive the many accolades that came in this year.
2023 Year In Review
While we feel
incredibly grateful
and proud of all of
the recognition, we
whole-heartedly
believe that our
mission is to enrich
and empower the lives
of our customers
and our community.
Out Of This World Educator Awards recognizing
excellent teachers with a ceremony and a $5,000 gift
thousands of employee-donated dollars
soundness. The value of our deposit base
matched to organizations all over our
and our enviable footprint throughout
footprint, the launch of the Power of
the Carolinas continues to shine brightly.
Good grant initiative, and our annual
The Power of Good
Out Of This World Educator Awards.
Our commitment to Our Promise to
Our Power of Good corporate
citizenship program took a front seat
in 2023, particularly coming off of the
heels of the Project Launch campaign in
2022. First Bank was able to give away
thousands of books through the First
Bank Book Club and its author visits and
nonprofi t partnerships. Our associates
provided 189 fi nancial education
Service Excellence, supporting not just our
Lastly, First Bank hosted its fi rst-ever bank-
customers but our community and each
wide food drive honoring a late associate,
other, will continue to move us forward
Sharon Adams, culminating in over 23,000
as One Team. One Bank. One Promise.
pounds of food donated to various food
banks chosen by our associates that
Here’s to another year of growth,
spanned across the Carolinas.
giving, and excitement in 2024!
The Bright Side
Sincerely,
sessions as part of Teach Children to
All of these things happened while
Save, and through the Power of Good,
navigating the diffi cult fi nancial
First Bank donated $173,000 to the
schools we visited throughout the
Carolinas. This is also in addition to
the hundreds of volunteer hours and
environment in our industry in 2023.
While many of our peers struggled, we
were able to grow our balance sheet
and maintain our focus on safety and
Richard H. Moore
Chief Executive Offi cer
Students show off the new books they received during
a First Bank Book Club author visit to their school.
Employees were eager to help their local food
banks during the fi rst-ever, bank-wide food drive.
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, 2023
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, 2023 as reported by The NASDAQ Global Select Market, was
approximately $1,177,802,000.
The number of shares of the registrant’s Common Stock outstanding on February 27, 2024 was 41,134,360.
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
Cybersecurity
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, 2023 and 2022
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2023
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended
December 31, 2023
Consolidated Statements of Shareholders’ Equity for each of the years in the three-year period ended
December 31, 2023
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31,
2023
Notes to the Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
(BDO USA, P.C.; Philadelphia, PA; 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
19
31
31
32
33
33
33
34
35
62
66
67
68
69
70
72
124
128
128
129
129
130
130
130
130
131
132
133
134
Item 1
Item 1A
Item 1B
Item 1C
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 2024 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or
before April 29, 2024.
3
MD&A and Financial Statement References
In this Report: "2023 MD&A" and "2023 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, "2023 Financial Statements" and "2023 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
Allowance for credit losses
Available for sale
The Anti-Money Laundering Act of 2020
Accumulated Other Comprehensive Income/Loss
Annual Report or
Report
Annual Report on Form 10-K
FDM
Financial Difficulty Modifications
Federal Reserve
Board of Governors of the Federal Reserve System
FFCB
FHLB
FHLMC
Federal Farm Credit Bank
Federal Home Loan Bank
Federal Home Loan Mortgage Corporation
ASC
FASB Accounting Standards Codification
FINCEN
Financial Crimes Enforcement Network
ASC 326
FASB ASC Topic 326, Financial Instruments – Credit
Losses
FNMA
Federal National Mortgage Association
ASC 350
FASB ASC Topic 350, Intangibles - Goodwill and Other
FOMC
Federal Open Market Committee
Asheville Savings ASB Bancorp, Inc. and its subsidiary Asheville Savings
GAAP
Accounting principles generally accepted in the United
States of America
ATM
AUC
Bank
Basel III
Bank SSB
Automated teller machine
Allowance for unfunded commitments
First Bank
Third Installment of the Basel Committee and Banking
System Accords
BHC Act
Bank Holding Company Act of 1956, as amended
Board of Directors of the Company or the Bank
GDP
GNMA
Gross Domestic Product
Government National Mortgage Association
GrandSouth
GrandSouth Bancorp and its subsidiary GrandSouth Bank
GSE
HTM
LIBOR
U.S. government-sponsored enterprise
Held to maturity
London Interbank Offered Rate
Bank owned life insurance
Magnolia Financial Magnolia Financial, Inc.
Bank Secrecy Act
MD&A
Management’s Discussion and Analysis of Results of
Operations and Financial Condition
CARES Act
Coronavirus Aid, Relief, and Economic Safety Act
NASDAQ
Carolina Bank
Carolina Bank Holdings, Inc. and it subsidiary Carolina
Bank
NIM
National Association of Securities Dealers Automated
Quotations Stock Market’s Global System
Net interest margin
CDARS
Certificate of Deposit Account Registry Service
Non-PCD
Not Purchased Financial Assets with Credit Deterioration
CECL
CEO
CET1
CFPB
Current expected credit loss model
Chief Executive Officer
Common equity tier 1
Consumer Financial Protection Bureau
Commissioner
North Carolina Commissioner of Banks
Company
First Bancorp and its consolidated subsidiaries
Community Reinvestment Act of 1977
NPA(s)
NSF
OFAC
Patriot Act
PCD
PPP
SBA
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
Commercial real estate
SBA Complete
SBA Complete, Inc.
Board
BOLI
BSA
CRA
CRE
DIF
Deposit Insurance Fund of the FDIC
Dodd-Frank Act
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
SEC
Select
TCE
TDR
Securities and Exchange Commission
Select Bancorp, Inc. and its subsidiary Select Bank & Trust
Company
Tangible common equity
Troubled debt restructuring
Treasury
We/us/our
United States Department of the Treasury
First Bancorp and its consolidated subsidiaries
4
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 21E of the 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, 2023,
the Company had total consolidated assets of $12.1 billion, total loans of $8.2 billion, total deposits of $10.0 billion,
and shareholders’ equity of $1.4 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, 2023, 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.
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
In January, 2023, we acquired GrandSouth, a community bank headquartered in Greenville, South Carolina with
$1.2 billion in total assets, $1.0 billion in loans, and $1.1 billion in deposits. GrandSouth operated from eight
branches located throughout South Carolina, all of which we have continued to operate. The acquisition
accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the high-
growth markets of the state including Greenville, Charleston and Columbia.
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 in our SBA Lending Division, 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 retain the
non-guaranteed portion on our balance sheet. We also provide used car floor-plan financing through our CarBucks
division. These lines of credit are typically offered to small used car dealers and are subject to traditional floor-plan
administration procedures.
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, 2023 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 seek 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 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 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 $10 million and $15 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 Chief Credit Officer who has $25 million in lending authority. For loans in excess of this amount, the Chief
Executive Officer 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 $210.5 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. In order to monitor the portfolio for possible concentrations, we categorize our
CRE loans by regulatory categories, including multi-family, retail, warehouse, office, healthcare, hotel/motel, and
other commercial real estate. As of December 31, 2023, the largest category of CRE loans, which totaled
approximately of 10% of total loans, was retail followed by warehouse and multifamily, both at approximately 7% of
total loans. These CRE categories are within management's guidelines as a percent of total capital. The loans
within these categories 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 ACL.
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, 2023 and 2022.
Wake County, North Carolina
New Hanover County, North Carolina
Mecklenburg County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
2023
2022
10.1 %
8.1 %
7.6 %
5.3 %
5.0 %
11.6 %
9.1 %
7.9 %
6.1 %
5.0 %
No other market (as defined by county) had total loans outstanding in excess of 5% of the total portfolio at either
period presented. 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.
Investments are subject to concentration and maturity limits to avoid unnecessary risks. 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, as determined based on materiality and
other relevant factors, 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 Asset Liability Committee ("ALCO"), which also has oversight of the
Bank's investment activities. ALCO generally meets on a quarterly basis and reviews investment activity, portfolio
composition, portfolio tenure, and other elements as necessary to assess the overall position of the securities
portfolio and risk of the portfolio relative to the overall balance sheet. 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 ALCO and a summary report is presented
to 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 select
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's Bank Term Funding Program and discount window
borrowings program. On January 24, 2024, the Federal Reserve announced that no new loans will be made under
the Bank Term Funding Program on or after March 11, 2024.
8
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.
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, 2023, we conducted business from 118 branches, with 101 branch
offices located across North Carolina and 17 branches in South Carolina.
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), Greensboro/Winston-Salem (Triad region), Asheville and Wilmington. 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
South Carolina market 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 counties with the largest share of our deposit base as of December 31, 2023 and 2022. No other
market area (as defined by county) comprises more than 5% of our deposit base at either period presented.
Moore County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
2023
2022
10.8 %
7.2 %
5.0 %
10.9 %
8.3 %
6.0 %
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, non-traditional internet-based banks, insurance companies
and agencies, and other financial intermediaries and investment alternatives, including mortgage companies, credit
card issuers, leasing companies, finance companies, credit unions, 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
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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.
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, 2023,
we had 1,396 full-time and 49 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, or 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 18% minorities. Of our officer
population, 64% are female or minorities, while our executive management team consists of 39% 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 2023, we had a total of 82 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.
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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
plan. The Company’s 401(k) plan has historically matched 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,
11
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
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 mergers and assumptions of deposit liability transactions by member
banks, 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.
12
Failure to comply with these laws and regulations may subject the Bank to various penalties. Failure to comply with
consumer protection requirements may also result in failure to obtain any required regulatory approval for merger or
acquisition transactions we may wish to pursue.
Community Reinvestment. The CRA requires that, in connection with examinations of 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.
13
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
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. 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. The Bank is subject to limitations on interchange fees under the Durbin Amendment. The Durbin
Amendment rules establish 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
14
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.
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%.
In December 2023, the FDIC approved a final rule implementing a special assessment to replenish the DIF reserve
ratio. The special assessment will be collected at a quarterly rate of 3.36 basis points for a projected total of eight
quarters. The assessment will be applied to an institution's estimated uninsured deposits as of December 31, 2022,
adjusted to exclude the first $5 billion of uninsured deposits. The Bank's estimated uninsured deposits as of the
measurement date were $3.5 billion.
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, such as trust preferred securities, which the Company includes in Tier 1 capital.
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.
15
Financial Privacy and Cybersecurity. The federal banking regulators have adopted rules that limit the ability of
banks and other financial institutions to disclose non-public information about consumers to non-affiliated third
parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow
consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations
affect how consumer information is transmitted through diversified financial companies and conveyed to outside
vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that
is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports
and asset and income information from applications. Consumers also have the option to direct banks and other
financial institutions not to share information about transactions and experiences with affiliated companies for the
purpose of marketing products or services.
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. Additional discussion of our cybersecurity risk management process and strategy are contained
in Item 1C of this Report.
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
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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 amended 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
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.
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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.
Climate-Related Risk Management and Regulation
In recent years the federal banking agencies have increased their focus on climate-related risks impacting the
operations of banks, the communities they serve and the broader financial system. Accordingly, the agencies have
begun to enhance their supervisory expectations regarding the climate risk management practices of larger banking
organizations. On October 24, 2023, the OCC, the FDIC and the Federal Reserve jointly finalized principles for
climate-related financial risk management for national banks with more than $100 billion in total assets. Although
these risk management principles do not apply to the Bank directly based upon our current size, regulators
indicated that all banks, regardless of their size, may have material exposures to climate-related financial and other
risks that require prudent management. As climate-related supervisory guidance is formalized, and relevant risk
areas and corresponding control expectations are further refined, we may be required to expend significant capital
and incur compliance, operating, maintenance and remediation costs in order to conform to such requirements.
Additionally, in March of 2022, the SEC proposed new climate-related disclosure rules, the Proposed Rules for The
Enhancement and Standardization of the Climate-Related Disclosure for Investors File No. S7-10-22. If adopted as
expected, the rules would require new climate-related disclosures in SEC filings and audited financial statements,
including certain climate-related metrics and GHG emissions data, information about climate-related targets and
goals, transition plans, if any, and attestation requirements.
Digital Asset Regulation
The federal banking agencies have issued interpretive guidance and statements regarding the engagement by
banking organizations in certain digital asset activities. In August 2022, the Federal Reserve released supervisory
guidance encouraging each banking organization supervised by the agency to notify its lead supervisory point of
contact at the Federal Reserve prior to engaging in any digital asset-related activity. Prior to engaging in any such
activities, banking organizations are expected to ensure their proposed activities are legally permissible under
relevant state and federal laws, and ensure they have implemented adequate systems, risk management, and
internal controls to ensure that the activities are conducted in a safe and sound manner consistent with applicable
laws, including consumer protection laws.
On January 3, 2023, the federal banking agencies issued additional guidance in the form of a joint statement
addressing digital asset-related risks to banking organizations. That statement noted the recent volatility and
exposure of vulnerabilities in the digital asset sector and indicated that the agencies are continuing to assess
whether or how the digital asset-related activities of banking organizations can be conducted in a safe and sound
manner and in compliance with all applicable laws and regulations. The statement stressed that each agency has
developed, and expects banking organizations to follow, supervisory processes for evaluating proposed and existing
digital asset activities.
On February 23, 2023, the federal banking agencies issued a joint statement addressing liquidity risks to banking
organizations resulting from crypto-asset market vulnerabilities. The joint statement noted that deposits placed by a
crypto-asset-related entity and deposits that constitute stablecoin-related reserves may pose heightened liquidity
risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows. The
statement stressed that banking organizations should establish and maintain effective risk management and
controls commensurate with the level of liquidity risks from such funding sources.
Although the federal banking agencies have not developed formal regulations governing the digital asset activities
of banking organizations, the supervisory framework summarized above dictates that, in order to effectively identify
and manage digital asset-related risks and obtain supervisory non-objection to the proposed engagement in digital
asset activities, banking organizations must implement appropriate risk management practices, including with
respect to board and management oversight, policies and procedures, risk assessments, internal controls and
monitoring.
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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
Changes and instability in economic conditions, geopolitical matters and financial markets, including a
contraction of economic activity, could adversely impact our business, results of operations and financial
condition.
Our success depends, to a certain extent, upon global, domestic and local economic and political conditions, as well
as governmental monetary policies. Conditions such as changes in interest rates, money supply, levels of
employment and other factors beyond our control may have a negative impact on economic activity. Any contraction
of economic activity, including an economic recession, may adversely affect our asset quality, deposit levels and
loan demand and, therefore, our earnings. In particular, interest rates are highly sensitive to many factors that are
beyond our control, including global, domestic and local economic conditions and the policies of various
governmental and regulatory agencies and, specifically, the Federal Reserve. Throughout 2022 and 2023, the
FOMC raised the target range for the federal funds rate on eleven separate occasions, citing factors including the
hardships caused by the ongoing Russia-Ukraine conflict, continued global supply chain disruptions and
imbalances, and increased inflationary pressure.
The tightening of the Federal Reserve’s monetary policies, including repeated and aggressive increases in the
target range for the federal funds rate as well as the conclusion of the Federal Reserve’s tapering of asset
purchases, together with ongoing economic and geopolitical instability, have increased the risk of an economic
recession. Although forecasts have varied, many economists are projecting that, while indicators of U.S. economic
performance, such as income growth, may be strong and levels of inflation may continue to decrease, the U.S.
economy may be flat or experience a modest decrease in gross domestic output in 2024 while inflation is expected
to remain elevated relative to historic levels in the coming quarters. Any such downturn in economic output,
especially domestically and in the markets in which we operate, may adversely affect our asset quality, deposit
levels, loan demand and results of operations.
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Recessionary conditions and economic factors could result in heightened credit risk and increases in our
level of nonperforming loans which could adversely impact our results of operations and financial
condition.
As a result of the economic and geopolitical factors discussed above, we also face heightened credit risk, among
other forms of risk. As we have a significant amount of real estate loans, decreases in real estate values could
adversely affect the value of property used as collateral, which, in turn, can adversely affect the value of our loan
and investment portfolios. While CRE values continue to fluctuate, some markets are showing signs of stabilizing
prices. However, the outlook for CRE remains dependent on the broader economic environment and, specifically,
how major subsectors respond to a rising interest rate environment and higher prices for commodities, goods and
services. Credit performance over the medium- and long-term is susceptible to economic and market forces and
therefore forecasts remain uncertain. Instability and uncertainty in the commercial and residential real estate
markets, as well as in the broader commercial and retail credit markets, could have a material adverse effect on our
financial condition and results of operations.
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. In 2023 and 2022, there was a pronounced rise in inflation and the Federal
Reserve raised certain benchmark interest rates in an effort to combat this trend. While the inflation rate has
responded favorably to actions taken by the Federal Reserve, our customers may continue be affected by inflation
pressures 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 or to finance future home purchases.
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 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.
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 model
assumption 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
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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.
We are subject to interest rate risk, which could negatively impact earnings.
Net interest income is the most significant component of our earnings. Our net interest income results from the
difference between the yields we earn on our interest-earning assets, primarily loans and investments, and the rates
that we pay on our interest-bearing liabilities, primarily deposits and borrowings. When interest rates change, the
yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities do not
necessarily move in tandem with each other because of the difference between their maturities and repricing
characteristics and which can negatively impact net interest income.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic
conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.
Changes in monetary policy, including changes in interest rates, influence not only the interest we receive on loans
and investments and the amount of interest we pay on deposits and borrowings, but such changes could also affect
(i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities; and (iii)
the average duration of our mortgage portfolio and other interest-earning assets. In January 2022, due to elevated
levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced after several
periods of historically low federal funds rates and yields on Treasury notes that it would be slowing the pace of its
bond purchasing and increasing the target range for the federal funds rate over time. Therefore, the FOMC
increased the target range eleven times throughout 2022 and 2023. As of December 31, 2023, the target range for
the federal funds rate had been increased to 5.25% - 5.50%. It remains uncertain whether the FOMC will further
increase the target range for the federal funds rate to attain a monetary policy sufficiently restrictive to return
inflation to more normalized levels, begin to reduce the federal funds rate or leave the rate at its current elevated
level for a lengthy period of time.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received
on loans and other investments, as experienced in 2023, our net interest income, and therefore earnings, will
generally be adversely affected. Earnings could also be adversely affected if the interest rates received on our loans
and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Although
management believes it has implemented effective asset and liability management strategies to reduce the potential
effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in
market interest rates could have a material adverse effect on our financial condition and results of operations, and
any related economic downturn, especially domestically and in the markets in which we operate, may adversely
affect our asset quality, deposit levels, loan demand and results of operations. Also, our interest rate risk modeling
techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our
balance sheet.
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.
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.
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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.
The proportion of our deposit account balances that exceed FDIC insurance limits may expose the Bank to
enhanced liquidity risk in times of financial distress.
In its assessment of the bank failures occurring in the first and second quarters of 2023, the FDIC concluded that a
significant contributing factor to the failures of the institutions was the proportion of the deposits held by each
institution that exceeded FDIC insurance limits. Uninsured deposits historically have been viewed by the FDIC as
less stable than insured deposits. In July 2023, the federal banking agencies issued an interagency policy statement
to underscore the importance of robust liquidity risk management and contingency funding planning. In the policy
statement, the regulators noted that banks should maintain actionable contingency funding plans that take into
account a range of possible stress scenarios, assess the stability of their funding and maintain a broad range of
funding sources, ensure that collateral is available for borrowing, and review and revise contingency funding plans
periodically and more frequently as market conditions and strategic initiatives change.
If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources
of funding would be required to meet withdrawal demands, the Company may be unable to obtain funding at
favorable terms, which may have an adverse effect on our net interest margin. Moreover, obtaining adequate
funding to meet our deposit obligations may be more challenging during periods of elevated prevailing interest rates,
such as the present period. Our ability to attract depositors during a time of actual or perceived distress or instability
in the marketplace may be limited. Further, interest rates paid for borrowings generally exceed the interest rates
paid on deposits. This spread may be exacerbated by higher prevailing interest rates. In addition, because our AFS
investment securities lose value when interest rates rise, after-tax proceeds resulting from the sale of such assets
may be diminished during periods when interest rates are elevated. For additional information regarding uninsured
deposits and liquidity, see Deposits and Liquidity sections of 2023 MD&A Item 7 following.
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 us and/or our 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 our
business operations. Any successful cyberattack may subject us to regulatory investigations, litigation (including
class action litigation) or enforcement, or require the payment of regulatory fines or penalties or undertaking costly
remediation efforts with respect to third parties affected by a cybersecurity incident, all or any of which could
adversely affect our business, financial condition or results of operations and damage our reputation. In addition, we
cannot guarantee that any costs and liabilities incurred in relation to an attack or incident will be covered by our
existing insurance policies or that applicable insurance will be available to us in the future on economically
reasonable terms or at all.
Information security risks for financial institutions continue to increase in part because of new
technologies, the increased use of the internet and telecommunications technologies (including mobile
devices and cloud computing) to conduct financial and other business transactions, political activism, and
the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and
others.
We rely on computer systems, hardware, software, technology infrastructure and online sites and networks for both
internal and external operations that are critical to our business. Operational risk related to cyberattacks is
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increasing as cyberattacks evolve and have a greater and more pervasive economic impact. In addition to
cyberattacks or other security breaches involving the theft of sensitive and confidential information, hackers have
engaged in attacks against financial institutions designed to disrupt key business services, such as customer-facing
web sites. Critical infrastructure sectors, including financial services, increasingly have been the targets of
cyberattacks, including attacks emanating from foreign countries. Cyberattacks involving financial institutions,
including distributed denial of service attacks designed to disrupt external customer-facing services, nation state
cyberattacks and ransomware attacks designed to deny organizations access to key internal resources or systems
or other critical data, as well as targeted social engineering and phishing email and text message attacks designed
to allow unauthorized persons to obtain access to an institution’s information systems and data or that of its
customers, are becoming more common and increasingly sophisticated. Further, threat actors are increasingly
seeking to target vulnerabilities in software systems (including bugs, vulnerabilities in third-party systems or
software and technical misconfigurations in hardware and software) and weak authentication controls used by large
numbers of banking organizations in order to conduct malicious cyber activities. These types of attacks have
resulted in increased supply chain and third-party risk. Because the methods of cyberattacks change frequently or,
in some cases, are not recognized until launch, we are not able to anticipate or implement effective preventive
measures against all possible security breaches and the probability of a successful attack cannot be predicted.
Although we employ detection and response mechanisms designed to contain and mitigate security incidents, early
detection may be thwarted by persistent sophisticated attacks and malware designed to avoid detection. Our
inability to prevent, detect, and respond to cyberattacks may lead to reputational damage, litigation with third
parties, and increased cybersecurity protection and remediation costs, which in turn could materially adversely
affect our results of operations.
From time to time, we engage in acquisitions, including acquisitions of depository institutions. The
integration of core systems and processes for such transactions often occurs after the closing, which may
create elevated risk of cyber incidents.
We may be subject to the data risks and cyber security vulnerabilities of the acquired company until we have
sufficient time to fully integrate the acquiree’s customers and operations. Although comprehensive due diligence of
cybersecurity policies, procedures and controls of our acquisition counterparties is performed, and we maintain
adequate policies, procedures, controls and information security protocols to facilitate a successful integration, there
can be no assurance that such measures, controls and protocols are sufficient to withstand a cyberattack or other
security breach with respect to the companies we acquire, particularly during the period of time between the
transaction closing and final integration.
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.
Lack of system integrity or credit quality related to funds settlement could result in a financial loss.
We settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients,
card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions we
facilitate include wire transfers, debit card, credit card and electronic bill payment transactions, supporting
consumers, financial institutions and other businesses. These payment activities rely upon the technology
infrastructure that facilitates the verification of activity with counterparties and the facilitation of the payment. If the
continuity of our operations or integrity of our processing were compromised, this could result in a financial loss to
us due to a failure in payment facilitation. In addition, we may issue credit to consumers, financial institutions or
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other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial
loss to us.
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.
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.
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.
Recent volatility in the banking sector, triggered by the bank failures occurring in 2023 may result in
legislative initiatives, agency rulemaking activities, or changes in agency policies and priorities that could
subject the Company and the Bank to enhanced government regulation and supervision.
Investor and customer confidence in the banking sector, particularly with regard to mid-size and larger regional
banking organizations, waned in response to the failures of Silicon Valley Bank, Signature Bank and First Republic
Bank in early 2023. Congress and the federal banking agencies have and continue to evaluate the events leading
to these bank failures. Legislators and the leadership of the federal banking agencies noted that inadequate
prudential regulation of regional banking organizations (generally, institutions with less than $250 billion in total
assets), insufficient supervision of such organizations, poor management and inadequate risk management
practices, specifically including interest rate and liquidity risks in consideration of each institution’s business model,
and substantial uninsured deposit liabilities were causes of the failures.
24
Further evaluation of recent developments in the banking sector may lead to governmental initiatives intended to
prevent future bank failures and stem significant deposit outflows from the banking sector, including (i) legislation
aimed at preventing similar future bank runs and failures and stabilizing confidence in the banking sector over the
long term, (ii) agency rulemaking to modify and enhance relevant regulatory requirements, specifically with respect
to liquidity risk management, deposit concentrations, capital adequacy, stress testing and contingency planning, and
safe and sound banking practices, and (iii) enhancement of the agencies’ supervision and examination policies and
priorities. Although we cannot predict which initiatives may be pursued by lawmakers and regulators, any of the
potential initiatives if implemented could subject us to additional costs, limit the types of financial services and
products we may offer, and limit our future growth, any of which could materially and adversely affect our business,
results of operations or financial condition.
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.
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 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
25
banks. The financial services industry could become even more competitive as a result of legislative and regulatory
changes and continued consolidation. In addition, as customer preferences and expectations continue to evolve,
technology has lowered barriers to entry and made it possible for nonbanks to offer products and services
traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms,
and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually
any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting),
and merchant banking. Many of our competitors have fewer regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a
result, may offer a broader range of products and services as well as better pricing for those products and services
than we can.
Our ability to compete successfully depends on a number of factors, including, among other things:
•
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the ability to develop, maintain, and build upon long-term customer relationships based on top quality
service, high ethical standards, and safe, sound assets;
the ability to expand our market position;
the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely
affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and
results of operations.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of
new technology-driven products and services. The effective use of technology increases efficiency and enables
financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our
ability to address the needs of our customers by using technology to provide products and services that will satisfy
customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. We may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services
to our customers. Failure to successfully keep pace with technological change affecting the financial services
industry could have a material adverse impact on our business and, in turn, our financial condition and results of
operations.
New lines of business or new products and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing lines
of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances
where the markets are not fully developed. We may invest significant time and resources in these efforts. Initial
timetables for the introduction and development of new lines of business and/or new products or services may not
be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with
regulations, competitive alternatives, and shifting market preferences, may also impact the successful
implementation of a new line of business and/or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the effectiveness of our system of internal controls.
Failure to successfully manage these risks in the development and implementation of new lines of business and/or
new products or services could have a material adverse effect on our business and, in turn, our financial condition
and results of operations.
Our reported financial results are impacted by management’s selection of accounting methods and certain
assumptions and estimates.
Our accounting policies and methods are fundamental to the way we record and report our financial condition and
results of operations. Our management must exercise judgment in selecting and applying many of these accounting
policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate
manner to report our financial condition and results. In some cases, management must select the accounting policy
26
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
estimates include: the allowance for credit losses; business combinations, and goodwill and other intangible assets.
Our internal controls may be ineffective.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate
governance policies and procedures. Any system of controls, however well designed and operated, is based in part
on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the
controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations
related to controls and procedures could have a material adverse effect on our business, results of operations, and
financial condition.
As of December 31, 2023, management identified a material weakness regarding management’s failure to maintain
effective information technology general controls in the areas of user access management and segregation of
duties, within an application supporting the Company’s accounting and reporting processes. As a result, many of the
Company’s manual controls dependent upon the information derived from this information technology application
were also ineffective, as segregation of duties was not appropriately designed. Management's report on internal
controls over financial reporting and out plan for remediation of the identified material weakness is contained in Item
9A of this Report.
We may not be able to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain skilled people. Competition for the best
people in most activities engaged in by us can be intense, and we may not be able to hire sufficiently skilled people
or to retain them. The unexpected loss of services of one or more of our key personnel could have a material
adverse impact on our business because of their skills, knowledge of our markets, years of industry experience,
and/or the difficulty of promptly finding qualified replacement personnel.
Loss of key employees may disrupt relationships with certain customers.
Our business is primarily relationship-driven in that many of our key employees have extensive customer
relationships. Loss of a key employee with such customer relationships may lead to the loss of business if the
customers were to follow that employee to a competitor or otherwise choose to transition to another financial
services provider. While we believe our relationship with our key personnel is good, we cannot guarantee that all of
our key personnel will remain with our organization. Loss of such key personnel could result in the loss of some of
our customers.
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 vendor 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
27
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 vendor encounters difficulties or if we have
difficulty in communicating with such third party, it will significantly affect our ability to adequately process and
account for customer transactions, which would significantly affect our business operations.
We rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with
applicable contractual arrangements or service level agreements. We maintain a system of policies and procedures
designed to monitor vendor risks including, among other things, changes in the vendor’s organizational structure,
changes in the vendor’s financial condition, and changes in the vendor’s support for existing products and services.
While we believe these policies and procedures help to mitigate risk, and our vendors are not the sole source of
service, the failure of an external vendor to perform in accordance with applicable contractual arrangements or the
service level agreements could be disruptive to our operations, which could have a material adverse impact on our
business and its financial condition and results of operations.
We may be adversely affected by risks associated with potential and completed acquisitions.
As part of our growth strategy, we regularly evaluate merger and acquisition opportunities and conduct due
diligence activities related to possible transactions with other financial institutions and financial services companies.
As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities
may occur at any time. We seek merger and acquisition partners that are culturally similar, have experienced
management, and possess either significant market presence or have potential for improved profitability through
financial management, economies of scale, or expanded services.
Acquiring other financial institutions, financial services companies, or branches involves potential adverse impact to
our financial results and various other risks commonly associated with acquisitions, including, among other things:
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Incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating
potential transactions, and with integrating acquired businesses, resulting in the diversion of resources from
the operation of our existing businesses.
Difficulty in estimating the value of target companies or assets and in evaluating credit, operations,
management, and market risks associated with those companies or assets.
Payment of a premium over book and market values that may dilute our tangible book value and earnings
per share in the short and long term.
Potential exposure to unknown or contingent liabilities of the target company, including, without limitation,
liabilities for regulatory and compliance issues.
Exposure to potential asset quality issues of the target company.
Difficulties, inefficiencies or cost overruns associated with the integration of the operations, personnel,
technologies, services, and products of acquired companies with ours.
Inability to realize the expected revenue increases, cost savings, increases in geographic or product
presence, and/or other projected benefits.
Potential disruption to our business.
28
•
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The possible loss of key employees and customers of the target company.
Potential changes in banking, financial services or tax laws or regulations that may affect the target
company.
Failure to successfully integrate the entities we acquire into our existing operations could increase our operating
costs significantly and have a material adverse effect on our business, financial condition, and results of operations.
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 such 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.
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.
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 business. 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, 2023, our
goodwill totaled $478.8 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 Our Common Stock
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC or by any other
public or private entity. An investment in our common stock is inherently risky for the reasons described in this "Risk
29
Factors" section and elsewhere in this Report and is subject to the same market forces that affect the price of
common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your
investment.
Common stock is equity and is subordinate to our existing and future indebtedness and preferred stock
and effectively subordinated to all the indebtedness and other non-common equity claims against our
subsidiaries.
Shares of the common stock are equity interests in us and do not constitute indebtedness. As such, shares of the
common stock rank junior to all of our indebtedness and to other non-equity claims against us and our assets
available to satisfy claims against us, including our liquidation. Upon liquidation, lenders and holders of our debt
securities and any preferred stock that may be outstanding, would receive distributions of our available assets prior
to holders of our 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 the NASDAQ Global Select Market under the symbol “FBNC,”
the trading volume in our common stock is lower than that of other larger financial services companies. A public
trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the
marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the
individual decisions of investors and general economic and market conditions over which we have no control. Given
the 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
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 financial institutions, financial
services companies and branch locations. 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 company 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
30
systems, technology, banking centers, and other assets of the acquired company 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 company, the assets acquired or the proposed combined entity; and
losing key employees and customers as a result of an acquisition that is poorly received.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
The Company recognizes the security of our banking operations is critical to protecting our customers, maintaining
our reputation and preserving the value of the Company. The Board, primarily through its Risk Committee, provides
direction and oversight of the enterprise-wide risk management framework of the Company, and cybersecurity
represents a component of the Company’s overall approach to enterprise-wide risk management. The Company's
Information Security Program establishes policies and procedures for the measurement of the effectiveness and
efficiency of information security controls related to both design and operations. The Company leverages the
following guidelines and frameworks to develop and maintain its Information Security Program: FFIEC Information
Security IT Examination Handbook, FFIEC Business Continuity Management IT Examination Handbook, FFIEC
Cybersecurity Assessment Tool, and GLBA 501(b). In general, the Company addresses cybersecurity risks through
a comprehensive, cross-functional approach that is focused on confidentiality, security and availability of the
information that the Company collects and stores by identifying, preventing, and mitigating cybersecurity threats and
effectively responding to cyber threats when they occur.
As one of the elements of the Company’s overall enterprise-wide risk management approach, the Information
Security Program is focused on the following key areas:
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Security Operation and Governance: The Board has delegated to senior management responsibility for the
Information Security Program which is managed through the IT Steering Committee, which maintains
alignment and appropriate insight regarding information security activities.
Collaborative Approach: The Company has implemented a cross-functional approach to identifying,
preventing and mitigating cybersecurity threats and incidents, while also implementing controls and
procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions
regarding the public disclosure and reporting of such incidents can be made by management in a timely
manner.
Security Competencies: The Information Security department oversees a program of security competencies
and tools designed to protect the confidentiality, integrity, and availability of our data. These assets
represent a blend of various management (e.g., policies), operational (e.g., standards and processes), and
technical controls (e.g., tools and configurations).
Incident Response Plan: The Company has a contracted with a third-party to provides continual security
monitoring 24 hours per day, seven days per week, where resources actively deliver threat analysis,
vulnerability management, intrusion detection, and intrusion hunting. The Company’s Incident Response
Plan helps reduce the risks related to security incidents by providing guidelines on responding to incidents.
Third-Party Risk Management: Management of the Company’s third parties, including vendors and service
providers, is conducted through a risk-based approach and the level of due diligence is driven from risk
factors established by our Risk Management department. The process provides awareness and
collaboration across internal teams including Information Security and Business Continuity. A Technical
Requirements review process is conducted on new or significantly changed third parties, applications, or
technology to ensure that systems or third parties meet certain security baseline requirements. This process
is aimed at advocating the necessary security, infrastructure, and application standards or controls so that
information systems and the third party have recovery plans in place.
Security Awareness and Education: The Company provides annual, mandatory training for personnel
regarding security awareness as a means to equip the Company’s personnel with the understanding of how
31
to properly use and protect the computing resources entrusted to them, and to communicate the Company’s
information security policies, standards, processes and practices.
The Company leverages regular assessments to identify current and potential threats and vulnerabilities within the
Company’s environment. Technical vulnerabilities are identified using automated vulnerability scanning tools,
penetration testing, and system management tools, whereas non-technical vulnerabilities are identified via process
or procedural reviews. The Company conducts a variety of assessments throughout the year, both internally and
through third parties. Vulnerability assessment and penetration tests are performed on a regular basis to provide the
Company with an unbiased view of its environment and controls. Vulnerabilities identified during these assessments
are inventoried in a centralized tracking system and reported to management on a regular basis. A multi-step
approach is applied to identify, report and remediate these vulnerabilities, and the Company adjusts its information
security policies, standards, processes and practices as necessary based on the information provided by these
assessments. The results of key assessments are reported in summary to the Board annually.
Governance
The Risk Committee of the Board provides direction and oversight of the enterprise-wide risk management
framework of the Company, including the management of risks arising from cybersecurity threats. The Board Risk
Committee reviews and approves the Information Security Program and receives regular presentations which
include updates on cybersecurity risks, including the threat environment, evolving standards, projects and initiatives,
vulnerability assessments, third-party and independent reviews, technological trends and information security
considerations arising with respect to the Company’s peers and third parties. The Board Risk Committee also
receives information regarding any cybersecurity incident that meets established reporting thresholds, as well as
ongoing updates regarding any such incident until it has been addressed. The full Board receives reports from the
Board Risk Committee related to information cybersecurity.
Our Chief Information Officer ("CIO"), works collaboratively across the Company to implement a program designed
to protect the Company’s information systems from cybersecurity threats and to promptly respond to any
cybersecurity incidents in accordance with the Company’s Incident Response Plans including an assessment of the
potential materiality of any cybersecurity incident. To facilitate the success of the Company’s cybersecurity risk
management program, multidisciplinary teams throughout the Company are deployed to address cybersecurity
threats and to respond to cybersecurity incidents. Through ongoing communications with these teams, the CIO,
Information Security, and Risk Management teams monitor the prevention, detection, mitigation and remediation of
cybersecurity threats and incidents in real time, and report such threats and incidents to the Corporate Crisis
Management Team and ultimately the Board when appropriate.
To our knowledge, neither cybersecurity threats, nor the results including as a result of any previous cybersecurity
incidents have materially affected the Company, including its business strategy, results of operations or financial
condition. With regard to the possible impact of future cybersecurity threats or incidents, see Item 1A, Risk Factors -
Risks Related to Out Business.
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, Fletcher North
Carolina, and Troy North Carolina, which are owned by the Bank. At December 31, 2023, the Company operated
118 bank branches. The Company owned all of its bank branch premises except 17 branch offices for which the
land and buildings are leased and 10 branch offices for which the land is leased but the building is owned. The Bank
also leases several other office locations for administrative functions 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.
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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 Financial Information," which provide historic information on the market price for the
Company’s common stock. As of February 27, 2024, there were approximately 3,635 shareholders of record and
another approximately 17,059 shareholders whose stock is held in “street name.”
The tables in Item 7 under "Selected Financial Information" section also include information regarding cash
dividends declared per share of common stock for the periods presented. For each quarter in 2023, 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.
Securities authorized for issuance under equity compensation plans
Refer to “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 12.
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. The Company did not repurchase any shares of the
Company's common stock during either 2023 or 2022. As of December 31, 2023, there was no share repurchase
program in place.
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Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the five-
year period commencing December 31, 2018 and ending December 31, 2023, 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, 2018 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.
First Bancorp Comparison of Five-Year Total Return Performances (1)
Five Years Ended December 31, 2023
First Bancorp
Russell 2000 Index
S&P US BMI Banks Industry
Group Index
_____________
Total Return Index Values (1)
December 31,
2018
2019
2020
2021
2022
2023
$ 100.00
100.00
123.99
125.52
108.22
150.58
148.98
172.90
142.78
137.56
126.72
160.85
100.00
137.36
119.83
162.92
135.13
147.41
(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, 2018, reinvestment of dividends, and changes in market values. Total return index numerical values
used in this example are for illustrative purposes only.
Item 6. Reserved.
34
Total Return First BancorpRussell 2000 IndexS&P US BMI Banks Industry Group Index12/31/201812/31/201912/31/202012/31/202112/31/202212/31/2023050100150200
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. It 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.
Overview and 2023 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, 2023, the Bank had a 118 branch network in North Carolina and South Carolina and 1,421 full-time
equivalent employees. We have grown organically as well as through strategic acquisitions as discussed previously
in "Recent Developments and Acquisitions".
2023 Financial Highlights:
•
Return on average assets was 0.87% for the year ended December 31, 2023, as compared to 1.39% for
the prior year. Return on average common equity of 8.05% was reported for the year ended December 31,
2023 as compared to 13.40% for the prior year.
• Our total assets at December 31, 2023 were $12.1 billion, a 14.0% increase from a year earlier, with growth
driven by the GrandSouth acquisition, combined with organic loan growth during the year.
•
•
•
Total loans outstanding increased $1.5 billion, or 22.3%, during the year, which included $1.02 billion of
loans acquired from GrandSouth. Loans totaled $8.2 billion at December 31, 2023.
Credit quality continues to be strong with the NPA to total assets ratio at 0.37% as of December 31, 2023,
as compared to 0.36% at December 31, 2022. Net charge offs as a percentage of average loans were
0.08% for 2023, as compared to 0.01% for the prior year.
Capital remains strong with a total CET1 ratio of 13.20%, up from 13.02% for the prior year, and total risk-
based capital ratio of 15.54% as of December 31, 2023, as compared to 15.09% for the prior year.
• We earned net income of $104.1 million, or $2.53 diluted EPS, during 2023 compared to net income of
$146.9 million, or $4.12 diluted EPS, in 2022. The main drivers to the decrease in net income were as
follows:
•
•
•
•
Net interest income increased $21.8 million, or 6.7%, driven by higher interest income offset by
increased interest expense. The NIM on a tax-equivalent basis was 3.06% for 2023, a decrease of
22 basis points from the prior year. Despite the growth in average earning assets, the market-
driven increase in rates on liabilities occurred at a more rapid pace that the increase in yields on
assets which resulted in the reduction in NIM for 2023.
Total interest income increased $147.8 million in 2023 as compared to 2022, driven by higher
interest income on loans of $140.6 million related to a combination of higher volumes of average
balances and increased yields.
The increase in interest expense of $126.0 million was driven by higher market rates which resulted
in repricing of our deposits. Also contributing to higher interest expense was the utilization of short-
term borrowings to fund loan demand and deposit fluctuations and rate increases on our variable
rate trust preferred debt.
Provision for credit losses for 2023 of $17.8 million was up from $12.4 million in 2022 due primarily
to the initial provision established for acquired non-PCD loans of $12.2 million, combined with
organic loan growth experienced during the year. Offsetting these increases were updated loss
rates and improved economic forecasts used in our CECL model as discussed further in the
"Provision for Loan Losses" section below.
35
•
•
•
Noninterest income declined $10.5 million, which resulted primarily from lower other gains as 2022
contained several death benefit gains on our BOLI policies, lower SBA-related revenues, including
consulting fees and gains on sale, which was down $3.4 million year-over-year, and lower bankcard
revenues related to the Durbin limitations effective for us in July 2022. Refer to "Noninterest
Income" section below for further discussion.
Noninterest expense increased $59.2 million, primarily related to the GrandSouth acquisition
completed January 1, 2023, driving higher operating expenses, including merger expenses of $13.7
million, additional branch locations and personnel, and an increased number of customer accounts
and transaction volume creating additional expense. Refer to "Noninterest Expense" section below
for further discussion.
Income tax expense was down $10.5 million from the prior year relative to the lower pre-tax
income. The effective tax rate of 21.1% was up slightly from the prior year related to nondeductible
merger expenses.
Current Economic Conditions
Since 2022, economic activity has shown continued growth with improving gross domestic product results, low
unemployment and increased demand for goods and services. Inflationary pressures continue to a certain degree,
however, monetary policy actions taken by the Federal Reserve over the last eighteen months have resulted in a
significantly lower inflation rate in 2023 as compared to the prior year. While positive indicators are present, there
continues to be some uncertainty in economic conditions, and as such, 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, among other factors, 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 current economic conditions. 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 make it difficult to
grow assets and income.
The extent to which the current economic conditions 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 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 and related Allowance
for Unfunded Commitments, as well as business combinations, related fair value measurements and goodwill
determination to be the accounting areas that require the most subjective or complex judgments, estimates, and
assumptions, and where changes in those judgments, estimates, and assumptions (based on new or additional
information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on
our financial statements.
Our most significant accounting policies are presented in Note 1 to the accompanying consolidated financial
statements. These policies, along with the disclosures presented in the other notes to the consolidated financial
statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial
statements and how those values are determined.
Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments
While management uses the best information available to establish the ACL, future adjustments to the ACL and
methodology may be necessary if economic or other conditions differ substantially from the assumptions used in
36
making the estimates. We perform periodic and systematic detailed reviews of the loan portfolio to identify trends
and to assess the overall collectability of the portfolio. We believe the accounting estimate related to the ACL is a
“critical accounting estimate” as: (1) changes in it can materially affect the provision for loan 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 on
the consolidated statements of income. There are many factors affecting the ACL, some of which are quantitative,
while others require qualitative judgment. There are both internal factors (i.e., loan balances, historical loss rates,
credit quality, the contractual lives of loans), external factors (i.e., economic conditions such as trends in housing
prices, interest rates, GDP, inflation, and unemployment), and assumptions of probability of default and loss given
default by loan category, that can impact the ACL estimate. One of the most significant assumptions is the
macroeconomic scenario forecasts that determine the economic variables utilized in the ACL model. Due to the
inherent uncertainty in the macroeconomic forecasts, we evaluate a baseline scenario quarterly, as well as upside
or downside macroeconomic scenarios to assess the most reasonable scenario based on review of the variable
forecasts for each scenario, comparison to expectations, and sensitivity of variations in each scenario.
The most significant variable in the economic forecasts is the national unemployment rate and changes in
unemployment forecasts can have significant impact to the estimated ACL. Other economic variables include
national GDP, the national commercial real estate pricing index and the national home price index. We use the
national unemployment rate in all of our models regardless of the loan portfolio type, and we use a second
economic variable in each cohort model depending on the loan portfolio type. The ACL quantitative estimate is
sensitive to changes in the economic variable forecasts during the twelve-month reasonable and supportable
forecast period with a straight-line reversion over the next three years to long-term average loss factors. There
have been no changes to the reasonable and supportable period or reversion period in any year presented.
Although management believes its process for determining the ACL 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 on the
consolidated statements of income.
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.
We estimate expected credit losses on unfunded commitments to extend credit over the contractual period in which
we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable.
The allowance for off-balance sheet credit exposures, which is included in "Other liabilities" on the consolidated
balance sheets, is adjusted for as an increase or decrease to the provision for unfunded commitments. The
estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on
commitments expected to be funded over its estimated life. The methodology is based on a loss rate approach that
starts with the probability of funding based on historical experience. Similar to the methodology discussed above
related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and
reasonable and supportable forecasts.
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.
37
Business Combinations and Goodwill
We believe that the accounting for business combinations, goodwill, and other intangible assets also involves a
higher degree of judgment than most other significant accounting policies. 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
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 and Allowance for Unfunded Commitments section above.
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.
We believe that the accounting for goodwill also involves a higher degree of judgment than most other significant
accounting policies. 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.
ASC 350-10 establishes standards for an impairment assessment of goodwill. At each reporting date between
annual goodwill impairment tests, we consider potential indicators of impairment. Generally, absent potential
38
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 2023 there were no triggers warranting
interim impairment assessments and for the 2023 annual assessment, we concluded that it was more likely than not
that the fair value exceeded its carrying value. At December 31, 2023, we had $478.8 million of goodwill.
Recent Accounting Standards and Pronouncements
For information relating to recent accounting standards and pronouncements, see Note 1 to our consolidated
financial statements entitled “Summary of Significant Accounting Policies.”
RESULTS OF OPERATIONS
The following discussion reviews the results of operations and key drivers to change in the results of 2023 as
compared to 2022. For a description of our results of operations for 2022 as compared to 2021, refer to the
"Overview and 2022 Highlights," Results of Operations," and "Analysis of Financial Condition and Changes in
Financial Condition" sections of Item 7 in our 2022 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 $346.7 million in 2023, an increase of $21.8 million, or 6.7%, from the $324.9
million in 2022. The increase was due primarily to the increase in average earnings assets from both organic growth
and the GrandSouth acquisition completed in January 2023 which contributed $1.02 billion in total loans. For 2023,
average interest-earning assets increased $1.4 billion, or 14.5%, including growth of $1.6 billion in average loans,
partially offset by lower average securities.
Offsetting the higher net interest income related to the increase in average earning assets was the compression of
our NIM which, on a tax-equivalent basis, declined to 3.06% in 2023 from 3.28% in 2022. For internal purposes, we
evaluate our NIM on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities
to reported interest income, then dividing by total average earning assets. We believe that analysis of NIM on a tax-
equivalent basis is useful and appropriate because it allows a comparison of net interest in different periods without
taking into account the different mix of taxable versus non-taxable loans and investments that may have existed
during those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest
income and the resulting NIM as reported and on a tax-equivalent basis.
($ 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
2023
346,658
2,879
349,537
2021
246,395
2,243
248,638
$
$
3.03 %
3.06 %
3.25 %
3.28 %
3.13 %
3.16 %
The decrease in our NIM was driven by the rising market interest rates as the Federal Reserve's monetary policies
resulted in a 100 basis point rise in short-term rates between January and July 2023, after rates had risen 425 basis
points in 2022. The market-driven increase in rates on our liabilities occurred at a more rapid pace that the increase
in yields on our assets, thus our total yield on average earning assets increased 86 basis points while our cost of
39
funds increased 116 basis points, driving the compression in the NIM in 2023 as compared to the prior year. Our
mix of earning assets remained fairly stable between 2022 and 2023. Refer to the Average Balances and Net
Interest Income Analysis table below for additional discussion.
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)
Interest income – increased by accretion of loan discount on acquired loans
Interest income - increased by accretion of loan discount on retained SBA loans
Total interest income impact
Interest expense – (increased) reduced by (discount accretion) premium
amortization of deposits
Interest expense – increased by discount accretion of borrowings
Total net interest expense impact
Impact on net interest income
Year ended December 31,
2022
2023
2021
$
$
11,507
1,770
13,277
(3,101)
(842)
(3,943)
9,334
5,621
2,856
8,477
593
(254)
339
8,816
6,107
2,707
8,814
295
(249)
46
8,860
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 2023 with
the GrandSouth acquisition.
At December 31, 2023 and 2022, unaccreted loan discount on purchased loans amounted to $24.0 million and
$11.6 million, respectively. The GrandSouth acquired portfolio comprises the majority of the remaining unaccreted
loan discount at December 31, 2023.
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, 2023 and 2022,
unaccreted loan discount on SBA loans amounted to $3.5 million and $4.3 million, respectively.
40
The following table presents the major components of the net interest income and NIM.
Average Balances and Net Interest Income Analysis
2023
Avg.
Rate
Average
Volume
Year Ended December 31,
2022
Interest
Earned
or Paid
Average
Volume
Avg.
Rate
Interest
Earned
or Paid
Average
Volume
2021
Avg.
Rate
Interest
Earned
or Paid
$ 7,902,628
5.30 % $ 418,668
6,293,280
4.42 % 278,027
5,018,391
4.36 % 219,013
2,920,040
1.79 %
52,276
3,059,683
1.75 %
53,536
2,204,713
1.45 %
32,076
($ in thousands)
Assets
Loans (1) (2)
Taxable securities
Non-taxable securities
296,287
1.51 %
4,485
296,803
1.48 %
4,387
162,878
1.49 %
2,402
Short-term investments,
primarily interest-
bearing cash
Total interest-earning
314,537
4.24 %
13,330
339,419
1.48 %
5,007
485,337
0.50 %
2,427
assets
11,433,492
4.27 % 488,759
9,989,185
3.41 % 340,957
7,871,319
3.25 % 255,918
Cash and due from banks
Premises and equipment
Other assets
Total assets
93,182
151,980
354,379
$ 12,033,033
Liabilities and Equity
104,374
135,160
327,511
10,556,230
90,275
125,738
408,313
8,495,645
Interest-bearing checking
$ 1,457,272
0.42 % $
6,192
1,545,573
0.08 %
1,219
1,353,172
0.07 %
919
Money market deposits
3,355,992
2.34 %
78,643
2,515,897
0.22 %
5,610
1,923,614
0.16 %
3,158
Savings deposits
Other time deposits
668,730
0.15 %
1,024
739,681
0.06 %
737,330
2.58 %
19,023
551,852
0.46 %
Time deposits >$250,000
343,669
2.90 %
9,984
287,194
0.53 %
459
2,541
1,520
607,452
0.07 %
432,506
0.39 %
356,398
0.46 %
443
1,722
1,639
Total interest-bearing
deposits
6,562,993
1.75 % 114,866
5,640,197
0.20 %
11,349
4,673,142
0.17 %
7,881
Short-term borrowings
374,254
5.15 %
19,289
52,446
3.45 %
Long-term borrowings
99,858
7.96 %
7,946
65,358
4.51 %
1,808
2,946
—
— %
—
63,201
2.60 %
1,642
Total interest-bearing
liabilities
Noninterest-bearing
checking
7,037,105
2.02 % 142,101
5,758,001
0.28 %
16,103
4,736,343
0.13 %
9,523
3,613,973
3,643,308
2,728,768
Total sources of funds
10,651,078
1.33 %
9,401,309
0.17 %
7,465,111
0.13 %
Other liabilities
88,870
Shareholders’ equity
1,293,085
Total liabilities and
shareholders’ equity
$ 12,033,033
58,008
1,096,913
10,556,230
60,759
969,775
8,495,645
Net yield on interest-
earning assets and net
interest income
Net yield on interest-
earning assets and net
interest income – tax-
equivalent (3)
Interest rate spread
Average prime rate
3.03 % $ 346,658
3.25 % 324,854
3.13 % 246,395
3.06 % $ 349,537
3.28 % 327,634
3.16 % 248,638
3.15 %
8.20 %
3.29 %
4.86 %
3.14 %
3.25 %
(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 $0.5 million, $3.1 million, and $9.7 million for 2023, 2022, and
2021, respectively.
Includes accretion of discount on acquired and SBA loans of $13.3 million, $8.5 million, and $8.8 million in 2023, 2022, and 2021, respectively.
Includes tax-equivalent adjustments of $2.9 million, $2.8 million and $2.2 million in 2023, 2022, and 2021, respectively, to reflect the federal and state tax
benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due
to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest
expense.
41
The following table presents additional detail regarding the estimated impact that changes in loan and deposit
volumes and changes in the interest rates we earned/paid had on our net interest income in 2023 and 2022.
Volume and Rate Variance Analysis
($ in thousands)
Interest income:
Year Ended December 31, 2023
Year Ended December 31, 2022
Change Attributable to
Change Attributable to
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volumes
Changes
in Rates
Total
Increase
(Decrease)
$
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
78,177
(2,472)
(8)
(711)
74,986
(223)
10,780
(77)
4,244
970
15,694
13,950
2,112
31,756
62,464
1,212
106
9,034
72,816
5,196
62,253
642
12,238
7,494
87,823
3,531
2,888
94,242
140,641
(1,260)
98
8,323
147,802
4,973
73,033
565
16,482
8,464
103,517
17,481
5,000
125,998
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
Net interest income
$
43,230
(21,426)
21,804
67,843
10,616
78,459
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 $21.8 million in 2023. Higher earning asset
volumes were the primary driver of the increase in net interest income which was offset by increases in rates on
interest-bearing liabilities.
•
•
•
•
•
For 2023, higher loan volume was the primary contributor to increased interest income, driving $78.2 million
of the increase. Higher market rates contributed to an additional $62.5 million of loan interest income.
Variable rate loans comprise approximately 19% of the loan portfolio and, accordingly, the magnitude of the
impact we experience from each rate increase is limited.
Decreases in the overall volume of average investment securities, somewhat offset by higher yields on the
portfolio, resulted in decreased interest income of $1.2 million in 2023.
Although partially offset by lower average balances, higher yields on other interest-earning assets (primarily
interest-bearing cash balance) in 2023 resulted in a $8.3 million higher interest income for the year.
The increase of $103.5 million in interest expense on deposits was driven by higher rates on accounts as
we repriced deposits during the year in response to the market increases and to retain deposits to meet our
funding needs, combined with higher volumes, primarily in money market deposit accounts and other time
deposits.
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 $16.1 million in 2023. This was
coupled with the higher cost of short-term advances and increases on our variable rate trust preferred
securities, which added $6.4 million to interest expense for the year.
42
Provision for Loan Losses and Provision for Unfunded Commitments
The provision for loan losses has been determined under ASC 326 since our implementation of CECL. The
provision for loan losses represents our current estimate of life of loan credit losses in the loan portfolio and the
provision for unfunded commitments represents expected losses on unfunded loan commitments that are expected
to result in outstanding loan balances. 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 allowance for unfunded commitments, as well as the resulting provision for loan losses and provision
for unfunded commitments. The allowance for unfunded commitments is included in "Other liabilities" in the
consolidated balance sheets.
The provision for loan losses was $19.8 million in 2023 and $12.6 million in 2022. 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 primary contributor to the higher provision for 2023 was the one-time loan
loss provision of $12.2 million recorded to establish an initial ACL for non-PCD loans acquired from GrandSouth in
accordance with our CECL model. The increase related to acquired and organic growth during the year was
partially offset by updated economic forecasts and loss driver inputs to the CECL model. We subscribe to a third-
party service which provides quarterly macroeconomic scenarios for the United States economy. For 2023, 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
improvement of the economy demonstrated in lower projected unemployment rates, improved GDP, and increasing
price indices for both commercial real estate and residential mortgages. These improving economic projections
translated to lower forecasted losses in our loan portfolio and, thus a lower estimated ACL, exclusive of portfolio
growth.
Also under the CECL method, in 2023 we recorded a reduction in the provision for unfunded commitments of
$1.9 million compared to $0.2 million for 2022. 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 of 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 $57.5 million in 2023, $68.0 million in 2022, and $73.6 million in 2021.
Management evaluates noninterest income on a non-GAAP basis that excludes items such as securities gains and
losses and other gains and losses because we believe excluding those items results in a more meaningful reflection
of noninterest income from regular operations. We refer to this as "adjusted noninterest income." Adjusted
noninterest income amounted to $54.8 million in 2023, $60.6 million in 2022, and $73.2 million in 2021. A
reconciliation of reported noninterest income to adjusted noninterest income is presented in the table below. Drivers
of the more significant fluctuations follow the table.
43
Noninterest Income
($ in thousands)
Service charges on deposit accounts
Other service charges and fees -bankcard and interchange income, net
Other service charges - other
Fees from presold mortgage loans
Commissions from sales of financial products
SBA consulting fees
SBA loan sale gains
Bank-owned life insurance ("BOLI") income
Securities losses, net
Other gains, net
Total noninterest income
Non-GAAP adjustments - exclude:
Securities losses, net
Other gains, net
Adjusted noninterest income
Year Ended December 31,
2022
2021
2023
$
$
16,800
9,319
12,951
1,613
5,503
1,803
2,489
4,350
—
2,662
57,490
—
(2,662)
54,828
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
Service charges on deposit accounts increased $1.3 million, or 8.2%, in 2023 as compared to 2022. The increase
in 2023 was driven by the higher number of new customers and transaction accounts generating fees from both the
GrandSouth acquisition and organic growth.
Other service charges and fees - bankcard interchange income,net represents interchange income from debit and
credit card transactions, net of associated interchange expense and amounted to $9.3 million in 2023, a 37.9%
decrease from the $15.0 million in 2022. The decrease of $5.7 million was a direct result of the Durbin Amendment
limitation on debit card interchange fees becoming applicable to the Company beginning in July 2022. The
reduction in interchange rates was partially offset by higher volumes of accounts and transactions.
Other service charges and fees - other includes items such as ATM charges, wire transfer fees, safety deposit box
rentals, fees from sales of personalized checks, and check cashing fees. Also included in this category are SBA
guarantee servicing fees and related servicing rights amortization which fluctuate based on the volume of and
prepayment speeds on SBA loans serviced which have slowed down in the current year. The increase in this item in
2023 of $1.7 million, or 14.6%, was due in part to the higher number of accounts and volume of transactions,
combined with lower servicing right amortization expense given the current high interest rate environment.
SBA consulting fees and SBA loan sale gains both declined in 2023 primarily due to fewer third-party bank SBA
clients, slower loan originations and lower premiums available on SBA loan sales given the market conditions during
the year.
BOLI income increased 13.1% in 2023, primarily related to the acquisition of GrandSouth in the first quarter of 2023
which had $15.1 million in BOLI assets as of the date of acquisition.
Other gains, net amounted to a net gain of $2.7 million for 2023. For 2022, the balance consisted primarily of death
benefits realized on BOLI policies which were nominal in 2023.
Noninterest Expenses
Total noninterest expenses totaled $254.4 million, $195.2 million, and $184.7 million, for 2023, 2022, and 2021,
respectively. Management evaluates noninterest expense on a non-GAAP basis that excludes items such as
merger and acquisition expense, amortization of intangible assets, and foreclosed property (gain) losses, because
we believe excluding those items results in a more meaningful reflection of noninterest expense from regular
operations. We refer to this as "adjusted noninterest expense." The following table presents the primary
components of noninterest expense and a reconciliation of reported noninterest expense to adjusted noninterest
expense.
44
Noninterest Expenses
($ in thousands)
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Credit card rewards and other bankcard expenses
Telephone and data lines
Software licenses and other software costs
Data processing expense
Professional fees
Advertising and marketing
Non-credit losses
FDIC and corporate insurance costs
Other operating expenses
Merger and acquisition expenses
Amortization of intangible assets
Foreclosed property (gains) losses, net
Total noninterest expense
Non-GAAP adjustments - exclude:
Merger and acquisition expenses
Amortization of intangible assets
Foreclosed property (gains) losses, net
Adjusted noninterest expense
Year Ended December 31,
2022
2021
2023
$
$
114,377
25,474
139,851
14,963
6,027
5,288
3,960
8,717
8,733
5,409
4,055
4,766
9,257
21,805
13,695
8,003
(150)
254,379
(13,695)
(8,003)
150
232,831
96,321
21,397
117,718
12,796
5,808
1,653
3,631
6,064
7,535
4,350
3,032
2,730
4,858
16,661
5,072
3,684
(372)
195,220
(5,072)
(3,684)
372
186,836
86,815
16,434
103,249
11,528
4,492
4,609
3,087
5,316
5,959
2,992
2,580
1,136
3,986
15,322
16,845
3,531
24
184,656
(16,845)
(3,531)
(24)
164,256
In general, the 30.3% increase in total noninterest expenses in 2023 as compared to 2022, was driven by the
acquisition of eight GrandSouth branch locations and related branch and support personnel which resulted in higher
salary and benefit expense (up $22.1 million, as compared to 2022) as well as other facilities (up $2.2 million from
the prior year) and support-related costs.
The current year included merger and acquisition expenses of $13.7 million, an increase of $8.6 million from 2022,
and higher intangible amortization which increased $4.3 million from the prior year, both of which were related to the
GrandSouth acquisition. While intangible amortization will continue, it is anticipated to be at a declining rate and we
do not anticipate any additional merger and acquisition costs related to GrandSouth.
FDIC and corporate insurance costs increased $4.4 million in 2023 driven by the general FDIC rate increase
effective January 1, 2023, combined with the acquired deposits from GrandSouth. Non-credit losses increased
$2.0 million as compared to the prior year driven by an increase in check fraud experienced in 2023. The increase
in bankcard expenses was related to higher volumes of customer accounts and transactions, combined with a 2022
rewards accrual reduction for expired benefits which resulted in lower expense in 2022 and a return to a more
normal level of expense for 2023.
Also contributing to higher noninterest expense in 2023 were increases for software costs, data processing,
professional fees, and advertising, as well as travel and training and franchise tax (both included in "other operating
expenses") related to the GrandSouth acquisition, including the transition of new customers and higher account and
transactions volumes.
Income Taxes
We recorded income tax expense of $27.8 million in 2023, $38.3 million in 2022, and $24.7 million in 2021. Our
effective tax rates were at 21.1% for 2023, 20.7% for 2022, and 20.5% for 2021. The slight increase in effective tax
rate for 2023 was attributable primarily to merger and acquisition expenses recorded resulting in non-deductible
adjustments for tax purposes.
45
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 $8.2 billion at December 31, 2023, an increase of $1.5 billion, or 22.3%, from
December 31, 2022. The GrandSouth acquisition was completed on January 1, 2023 and contributed $1.02 billion
in loans. The acquired loan portfolio mix was similar in nature to our portfolio mix. Loan growth for the year was as
follows:
($ in thousands)
Loans at December 31, 2022
Organic loan growth
Growth from acquisition
Loans at December 31, 2023
Organic loan growth percentage
Total loan growth percentage
$ 6,665,145
464,883
1,020,074
$ 8,150,102
7.0 %
22.3 %
The following table provides a summary of the loan portfolio composition at each of the past five year ends.
Loan Portfolio Composition
As of December 31,
2023
2022
2021
2020
2019
% of
Total
Loans
% of
Total
Loans
Amount
% of
Total
Loans
Amount
% of
Total
Loans
Amount
% of
Total
Loans
Amount
Amount
$ 905,862
11 % 641,941
9 % 648,997
11 % 782,549
17 % 504,271
11 %
992,980
12 % 934,176
14 % 828,549
13 % 570,672
12 % 530,866
12 %
1,259,022
16 % 1,036,270
16 % 991,775
16 % 754,570
16 % 816,325
18 %
2,528,060
31 % 2,123,811
32 % 1,813,849
31 % 1,096,781
23 % 893,776
20 %
($ in thousands)
Commercial and industrial
Construction, development
& other land loans
Commercial real estate -
owner occupied
Commercial real estate -
non owner occupied
Multi-family real estate
421,376
5 % 350,180
5 % 389,113
6 % 197,852
4 % 207,179
5 %
Residential 1-4 family real
estate
Home equity loans/lines of
credit
Consumer loans
Loans, gross
Unamortized net deferred
loan (fees) costs
1,639,469
20 % 1,195,785
18 % 1,021,966
17 % 972,378
21 % 1,105,014
25 %
335,068
4 % 323,726
5 % 331,932
5 % 306,256
6 % 337,922
68,443
1 %
60,659
1 %
57,238
1 %
53,955
1 %
56,172
8 %
1 %
8,150,280
100 % 6,666,548
100 % 6,083,419
100 % 4,735,013
100 % 4,451,525
100 %
Total loans
$ 8,150,102
6,665,145
6,081,715
4,731,315
(178)
(1,403)
(1,704)
(3,698)
1,941
4,453,466
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 82% 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 is non-owner occupied commercial real estate loans, followed by residential
1-4 family real estate and owner occupied commercial real estate loans. As demonstrated in the table above, while
there has been some variations in the relative percentage of each loan category to the total portfolio over the years,
the nature of our portfolio has not changed drastically from the prior year or the historical averages. The higher
46
percentage for commercial and industrial loan category in 2020 was an anomaly related to Paycheck Protection
Program ("PPP") loans made under the provisions of the CARES Act, which were forgiven in accordance with the
PPP loan provisions starting in late 2020 and through early 2022. The percentage of residential real estate loans
has declined somewhat over the last several years as consumers refinanced their home loans during the lower
interest rate environment from 2020 through early 2022 and the Bank was able to sell more of these loans in the
secondary market. With the increase in interest rates starting in 2022, the refinance activity slowed and the Bank
retained more loans in this category on the balance sheet.
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
Due within
one year
($ in thousands)
Amount
Yield
Variable Rate Loans:
As of December 31, 2023
Due after one year
but
within five years
Amount
Yield
Due after five years
but
within fifteen years
Yield
Amount
Due after fifteen
years
Total
Amount
Yield
Amount
Yield
Commercial and industrial
$ 118,797
8.41 %
42,027
8.64 %
41,858
10.47 %
311
10.52 % 202,993
177,259
9.06 % 167,350
8.33 %
2,672
7.85 %
2,649
9.10 % 349,930
8.90 %
8.70 %
Construction,
development & other land
loans
Commercial real estate -
owner occupied
Commercial real estate -
non owner occupied
Multi-family real estate
Residential 1-4 family real
estate
Home equity loans/lines
of credit
Construction,
development & other land
loans
Commercial real estate -
owner occupied
Commercial real estate -
non owner occupied
Residential 1-4 family real
estate
Home equity loans/lines
of credit
18,922
8.96 %
34,543
8.08 %
26,069
7.50 % 65,715
9.34 % 145,249
8.67 %
27,759
8.50 % 113,385
7.90 %
26,042
6.90 % 20,480
8.63 % 187,666
7.93 %
1,658
4,306
7.82 %
3,399
8.32 %
15,217
7.60 %
—
— % 20,274
9.39 %
27,749
8.08 %
27,255
6.50 % 272,189
4.38 % 331,499
7.73 %
4.80 %
10,365
8.87 %
24,434
8.78 % 279,818
8.64 %
16
8.50 % 314,633
8.65 %
6.97 %
4.93 %
3.93 %
4.08 %
Consumer loans
5,672
9.34 %
2,491
10.79 %
19
8.13 %
814
10.84 %
8,996
10.13 %
Total at variable rates
364,738
8.80 % 415,378
8.25 % 418,950
8.46 % 362,174
5.59 % 1,561,240
7.80 %
Fixed Rate Loans:
Commercial and industrial
146,477
17.22 % 264,361
4.89 % 181,722
3.62 % 101,485
2.95 % 694,045
156,464
5.26 % 250,483
4.90 % 235,703
4.75 %
—
— % 642,650
53,858
4.94 % 540,464
4.64 % 512,324
4.11 %
86
8.50 % 1,106,732
4.41 %
124,230
4.76 % 1,318,860
4.26 % 889,854
3.94 %
177
6.50 % 2,333,121
4.16 %
Multi-family real estate
10,062
4.56 % 232,889
4.02 % 158,150
3.76 %
—
— % 401,101
38,134
5.21 % 328,154
4.71 % 161,044
4.35 % 775,094
3.74 % 1,302,426
6,269
3.50 %
7,252
5.99 %
3,912
5.39 %
300
6.14 % 17,733
4.98 %
Consumer loans
19,720
6.07 %
29,546
7.47 %
7,188
7.29 %
2,392
16.78 % 58,846
Total at fixed rates
555,214
8.26 % 2,972,009
4.51 % 2,149,897
4.07 % 879,534
3.68 % 6,556,654
7.95 %
4.58 %
Subtotal
Nonaccrual loans
Total loans
919,952
8.48 % 3,387,387
4.97 % 2,568,847
4.79 % 1,241,708
4.24 % 8,117,894
5.20 %
32,208
$ 952,160
—
—
—
3,387,387
2,568,847
1,241,708
32,208
8,150,102
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 11% of our accruing loans outstanding at December 31, 2023 mature within one year and 53% of
total loans mature within five years. As of December 31, 2023, the percentages of variable rate loans and fixed rate
loans as compared to total performing loans were 19% and 81%, 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 mid-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 starting in 2022 and into 2023, we measure
our interest rate risk closely. Refer to additional discussion in the section “Interest Rate Risk” below.
47
The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number of
borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or
industries that would be similarly affected by economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries,
and geographic regions, the Company monitors exposure to credit risk that could arise from potential concentrations
of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g.
principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios.
Additionally, there are industry practices that could subject the Company to increased credit risk should economic
conditions change over the course of a loan’s life. For example, the Bank makes variable rate loans and fixed rate
principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans
are underwritten and monitored to manage the associated risks. The Company has determined that there is no
concentration of credit risk associated with its lending policies or practices.
Most of our business activity is with customers located within the markets where we have banking operations.
Therefore, our exposure to credit risk is significantly affected by changes in the economy within our markets.
Approximately 88% of our loan portfolio is secured by real estate and is therefore susceptible to changes in real
estate valuations.
Nonperforming Assets
NPAs include nonaccrual loans, modifications to borrowers in financial distress, loans past due 90 or more days and
still accruing interest, foreclosed real estate and, prior to the adoption of ASU 2022-02, accruing TDRs.
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. 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, 2023 and December 31, 2022.
In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms
significantly different from the originally contracted terms.
48
The following table summarizes our NPAs at the dates indicated.
Nonperforming Assets
($ in thousands)
Nonperforming assets
Nonaccrual loans
Modifications to borrowers in financial
distress
TDRs - accruing
Accruing loans >90 days past due
Total nonperforming loans
Foreclosed real estate
Total nonperforming assets
$
2023
2022
As of December 31,
2021
2020
2019
$
32,208
28,514
34,696
35,076
24,866
11,719
—
—
43,927
862
44,789
—
9,121
—
37,635
658
38,293
—
13,866
1,004
49,566
3,071
52,637
—
9,497
—
44,573
2,424
46,997
—
9,053
—
33,919
3,873
37,792
Allowance for credit losses
Total Loans
109,853
$
8,150,102
90,967
6,665,145
78,789
6,081,715
52,388
4,731,315
21,398
4,453,466
Asset Quality Ratios
Nonaccrual loans to total loans
Nonperforming loans to total loans
Nonperforming assets to total loans
and foreclosed real estate
Nonperforming assets to total assets
Allowance for credit losses to total
loans
Allowance for credit losses to
nonaccrual loans
Allowance for credit losses to
nonperforming loans
0.40 %
0.54 %
0.55 %
0.37 %
1.35 %
0.43 %
0.56 %
0.57 %
0.36 %
1.36 %
0.57 %
0.82 %
0.87 %
0.50 %
1.30 %
0.74 %
0.94 %
0.99 %
0.64 %
1.11 %
0.56 %
0.76 %
0.85 %
0.62 %
0.48 %
341.07 %
319.03 %
227.08 %
149.36 %
86.05 %
250.08 %
241.71 %
158.96 %
117.53 %
63.09 %
Our asset quality continues to be strong as demonstrated by stable or improving trends in all ratios as presented in
the table above. Our total nonperforming loans to total loans was 0.54% at December 31, 2023, while our total NPA
ratio was 0.37% at that date. Additional discussion of the credit quality classification status of our loans is contained
in Note 4 to our consolidated financial statements.
"Commercial and industrial" is the largest category of nonaccrual loans, at $9.9 million, or 30.7% of total nonaccrual
loans, followed by "Commercial real estate - non owner occupied" at $7.2 million, or 22.4% of total nonaccrual loans
and "Commercial real estate - owner occupied" at $7.0 million, or 21.9% of total nonaccrual loans.
As of December 31, 2023, SBA loans accounted for approximately $18.2 million of our nonaccrual loans, or 56.6%,
of the total SBA portfolio, and carried guarantees from the SBA totaling $9.3 million. This is compared to $14.6
million, or 9.5%, of the SBA portfolio at December 31, 2022. 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) totaled
$29.8 million at December 31, 2023, with the majority (74.8%) being in the residential 1-4 family real estate category
with the increase related primarily to the timing of year end over a weekend.
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 $44.1 million and $39.0 million
as of December 31, 2023 and 2022, respectively. In addition, loans that are in the risk category of "classified" which
are still accruing interest totaled $22.0 million at December 31, 2023 and $20.0 million at December 31, 2022.
These loans have a great risk of further deterioration and potential loss to the Bank.
49
Total foreclosed real estate amounted to $0.9 million at December 31, 2023, compared to $0.7 million in 2022. Six
property were added to foreclosed real estate during 2023 and we completed the sale of six properties during the
year. Four of the 2023 additions were within the population that sold in 2023.
Allowance for Credit Losses and Loan Loss Experience
The total allowance for credit losses amounted to $109.9 million at December 31, 2023 compared to $91.0 million at
December 31, 2022. Fluctuations in the ACL are based on loan mix and growth, changes in the levels of
nonperforming loans, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model,
and as occurred in 2023, adjustments for acquired loan portfolios. As discussed previously in the Provision for Loan
Losses section, much of the change to the level of ACL during the year ended December 31, 2023 is attributed to
the acquisition of GrandSouth. In addition to the initial allowance recorded for PCD loans of $5.6 million, the
Company recorded an initial provision of $12.2 million related to the non-PCD loans in the GrandSouth portfolio.
The balance of the change was a result of loan growth during the year and updated prepayment speed estimates in
the CECL model, which have slowed with market rate increases, thus requiring additional allowance for the
estimated longer life of loans. Somewhat offsetting the prepayment speed assumptions in the CECL model were
updated economic forecasts which have generally projected improvement of the economy demonstrated in lower
projected unemployment rates, improved GDP, and increasing price indices for both commercial real estate and
residential mortgages.
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 also to the discussion of the critical
estimates utilized in the ACL in the prior section, Critical Accounting Estimates, and 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.
50
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 any and all categories.
Allocation of the Allowance for Credit Losses
As of December 31,
($ in thousands)
2023
% of
Loan
Category
2022
% of
Loan
Category
2021
% of
Loan
Category
2020
% of
Loan
Category
2019
% of
Loan
Category
Commercial and
industrial
Construction,
development & other
land loans
Commercial real estate -
owner occupied
Commercial real estate -
non owner occupied
Multi-family real estate
Residential 1-4 family
real estate
Home equity loans/lines
of credit
Consumer loans
Total allocated
Unallocated
$ 21,227
2.34%
17,718
2.76%
16,249
2.50%
11,316
1.45%
4,553
0.90%
13,940
1.40%
15,128
1.62%
16,519
1.99%
5,355
0.94%
1,976
0.37%
18,218
1.45%
14,972
1.44%
12,317
1.24%
10,608
1.41%
5,186
0.64%
24,916
3,825
0.99%
22,780
1.07%
16,789
0.93%
11,465
1.05%
2,990
0.91%
2,957
0.84%
1,236
0.32%
1,530
0.77%
762
0.33%
0.37%
21,396
1.31%
11,354
0.95%
8,686
0.85%
8,048
0.83%
3,832
0.35%
3,339
2,992
109,853
1.00%
3,158
0.98%
4,337
1.31%
2,375
0.78%
1,127
4.37%
2,900
4.78%
2,656
4.64%
1,478
2.74%
972
0.33%
1.73%
90,967
78,789
52,175
21,398
—
n/a
—
n/a
—
n/a
213
n/a
—
n/a
Total
$ 109,853
1.35%
90,967
1.36%
78,789
1.30%
52,388
1.11%
21,398
0.48%
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
51
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
2023
2022
2021
2020
2019
$ 8,150,102
6,665,145
6,081,715
4,731,315
4,453,466
Average amount of loans outstanding
7,902,628
6,293,280
5,018,391
4,702,743
4,346,331
Allowance for credit losses, at end of year
109,853
90,967
78,789
52,388
21,398
As of December 31,
Net loan (charge-offs) recoveries
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total net charge-offs
Average loans:
Commercial and industrial
Construction, development & other land loans
$
(6,965)
(1,763)
250
321
502
13
373
(211)
(757)
$
(6,474)
480
477
432
11
17
557
(633)
(422)
$ 865,043
1,053,422
619,480
857,880
Commercial real estate - owner occupied
1,224,284
1,012,275
(1,978)
703
(212)
(1,562)
12
488
178
(309)
(2,680)
(4,863)
1,501
(335)
(24)
12
276
(37)
(579)
(4,049)
700,557
619,928
812,764
707,976
615,717
776,166
Commercial real estate - non owner occupied
2,464,389
1,968,944
1,322,685
1,012,182
(1,493)
722
(220)
(947)
186
48
322
(522)
(1,904)
482,654
503,183
814,783
860,783
197,100
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
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
402,814
357,491
1,482,941
1,091,788
341,778
67,957
326,592
58,830
256,396
951,573
300,291
54,197
193,415
1,028,334
1,074,938
316,593
52,360
346,331
66,559
$ 7,902,628
6,293,280
5,018,391
4,702,743
4,346,331
1.35%
1.36%
1.30%
1.11%
0.48%
16.97
215.56
29.40
12.94
11.24
305.07 %
2,985.78 %
358.62%
865.37%
118.86%
36.37%
90.55%
64.75%
52.38%
69.79%
Total net charge-offs as a percent of average loans
(0.08%)
(0.01%)
(0.05%)
(0.09%)
(0.04%)
Net (charge-offs) recoveries by loan category as a
percent of average loans:
Commercial and industrial
(0.81%)
(0.28%)
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
0.02%
0.03%
0.02%
—%
0.03%
(0.06%)
(1.11%)
0.06%
0.05%
0.02%
—%
—%
0.17%
(1.08%)
(0.28%)
0.11%
(0.03%)
(0.12%)
—%
0.05%
0.06%
(0.57%)
(0.69%)
0.24%
(0.04%)
—%
0.01%
0.03%
(0.01%)
(1.11%)
(0.31%)
0.14%
(0.03%)
(0.11%)
0.09%
—%
0.09%
(0.78%)
52
Securities
Our securities portfolio and the breakout of AFS and HTM securities is presented in the following table.
Securities Portfolio Composition
($ in thousands)
Securities available for sale:
US Treasury securities
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
2023
As of December 31,
2022
2021
$
172,570
60,266
1,937,784
18,759
168,758
57,456
2,045,000
43,279
—
69,179
2,514,805
46,430
Total securities available for sale
2,189,379
2,314,493
2,630,414
Securities held to maturity:
Mortgage-backed securities
State and local governments
Total securities held to maturity
12,085
521,593
533,678
15,150
526,550
541,700
20,260
493,565
513,825
Total securities
$
2,723,057
2,856,193
3,144,239
Average total securities during year, at amortized cost
$
3,216,327
3,356,486
2,367,591
The decrease in securities for the year ended December 31, 2023 was primarily due to regular principal repayments
received on mortgage-backed securities. We made no notable purchases of investment securities during 2023 and
we continue to utilize cash flows from amortizing investments to fund loan growth and fluctuations in deposits. Also
impacting the change in balances of AFS securities was the improvement in unrealized loss on AFS securities which
was $400.7 million at December 31, 2023 as compared to $444.1 million at December 31, 2022.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate
level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a
balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the
investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain
deposits. Essentially all of our mortgage-backed securities, which include both AFS and HTM securities, are issued
by GSEs or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet
at fair value for the AFS portfolio and at cost for the HTM portfolio.
The table below presents the composition, tax equivalent yields, and remaining maturities of our securities as of
December 31, 2023. For more information about these securities, including gross unrealized gains and losses by
type of security and securities pledged, see Note 3 to the consolidated financial statements.
53
Securities Portfolio Maturity Schedule
($ in thousands)
Securities available for sale
Remaining maturity:
One year or less
After one through five years
After five through ten years
After ten years
Fair Value
Amortized cost
Government
& govt.-
sponsored
enterprise
securities
US Treasury
securities
Mortgage-
backed
securities (1)
Corporate
debt
securities
Total
Weighted
Average
Yield (2)
$ 172,570
—
—
—
$ 172,570
—
8,602
51,664
—
1,525
408,067
1,419,410
108,782
2,406
—
15,354
999
176,501
416,669
1,486,428
109,781
60,266
1,937,784
18,759
2,189,379
2.38 %
2.52 %
1.76 %
1.68 %
$ 174,785
71,964
2,323,673
19,676
2,590,098
1.78 %
Weighted-average yield (2)
Weighted average maturity years
2.33 %
0.48
1.17 %
6.07
1.73 %
6.86
4.58 %
5.54
1.78 %
6.37
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
Mortgage-
backed
securities (1)
State and
local
governments
Total
Weighted
Average
Yield (2)
$
—
12,085
—
—
—
1,998
129,097
390,498
—
14,083
129,097
390,498
$ 12,085
521,593
533,678
— %
2.29 %
2.11 %
2.05 %
$ 11,447
438,176
449,623
2.09 %
2.53 %
2.99
2.07 %
2.09 %
10.51
10.37
(1) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.
(2) Yields have been computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a
ratable basis over the life of each security. Weighted average yield for each maturity range has been computed on a fully taxable-equivalent
basis using the amortized cost of each security in that range. Yields on tax-exempt investments have been adjusted to a taxable equivalent
basis using a 23.15% tax rate.
The majority of our GSE securities carry one maturity date, often with an issuer call feature. At December 31, 2023,
of the $60.3 million in AFS GSE securities, $33.8 million were issued by the FFCB, $24.9 million were issued by the
FHLMC, and the remaining $1.6 million were issued by the FHLB.
Nearly all of our $1.9 billion in AFS mortgage-backed securities at December 31, 2023 were issued by the FHLMC,
FNMA, GNMA, or the SBA, each of which is a government agency or a GSE and guarantees the repayment of the
securities. Included in this total are private-label commerical mortgage-backed securities of $0.7 million. Mortgage-
backed securities vary in their repayment in correlation with the underlying pools of mortgage loans.
At December 31, 2023, we held $533.7 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 $84.1 million at December 31, 2023.
Approximately $12.1 million of the HTM securities were mortgage-backed securities that have been issued by either
the FHLMC or FNMA. The remaining $521.6 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 $7.1 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.
54
Deposits
Deposits represent the primary funding source for our loans and investments. Total deposits amounted to
$10.0 billion at December 31, 2023, an increase of $804.1 million, or 8.7%, from December 31, 2022. The
GrandSouth acquisition was completed on January 1, 2023 and contributed $1.05 billion in deposits. The acquired
deposit portfolio mix was similar in nature to our deposits, with the exception of a slightly higher percentage of
money market accounts. Deposit growth for the year is as follows:
($ in thousands)
Deposits at December 31, 2022
Organic deposit contraction
Growth from acquisition
Deposits at December 31, 2023
Organic deposit contraction percentage
Total deposit growth percentage
$ 9,227,529
(245,808)
1,049,878
$ 10,031,599
(2.7) %
8.7 %
The contraction in deposits, exclusive of acquired deposits during 2023 is directly related to a strategic decision to
reduce brokered deposits during the year, which accounted for $249.3 million of the reduction in organic deposits as
presented in the table above. The balance of the difference, an increase of $3.5 million, indicates the stability of our
retail and commercial core deposits during a year with uncertainty and volatility experienced in the banking industry.
We continue to have a diversified and granular deposit base which has remained a stable source of funding. At
December 31, 2023, noninterest-bearing deposits accounted for 34% of total deposits. This is down slightly from
the prior year, in part due to the GrandSouth acquired deposits mix combined with changes in consumer behavior,
but continues to be in line with our historical trends and contributes to our low cost of funds.
The table below presents our historical deposit mix which has remained fairly consistent and continues to be
predominately transaction and non-time deposit accounts. As demonstrated in the below table, total time deposits
have declined to 10% of total deposits at December 31, 2023 from 18% at December 31, 2019. Such a shift in mix
is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits and
allows us to reprice these deposit categories at any time. Approximately 92% of our time deposits mature within
one year.
Deposit Composition
As of December 31,
($ in thousands)
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
2023
2022
2021
2020
2019
Noninterest-bearing
checking accounts
Interest-bearing
checking accounts
Money market
accounts
$ 3,379,876
34 % 3,566,003
39 % 3,348,622
37 % 2,210,012
35 % 1,515,977
31 %
1,411,142
14 % 1,514,166
16 % 1,593,231
17 % 1,172,022
19 % 912,784
18 %
3,653,506
36 % 2,416,146
26 % 2,562,283
28 % 1,581,364
25 % 1,173,107
24 %
Savings accounts
608,380
6 % 728,641
8 %
708,054
8 %
519,266
8 % 424,415
Other time deposits
610,887
6 % 464,343
5 %
547,669
6 %
415,269
7 % 462,898
9 %
9 %
Time deposits
>$250,000
Total customer
deposits
355,209
4 % 276,319
3 %
357,355
4 %
355,441
6 % 356,033
7 %
10,019,000
100 % 8,965,618
97 % 9,117,214
100 % 6,253,374
100 % 4,845,214
98 %
Brokered Deposits
12,599
— % 261,911
3 %
7,415
— %
20,222
— %
86,141
2 %
Total deposits
$ 10,031,599
100 % 9,227,529
100 % 9,124,629
100 % 6,273,596
100 % 4,931,355
100 %
While our customer deposits have remained fairly stable, there continues to be competition for deposits and the
market rate increases experienced starting in 2022 have resulted in changes in customer behavior driving the shift
to money market accounts during 2023. The number of net new deposit accounts continues to increase, however,
we have seen the average balance per account decline as compared to the prior year. We routinely engage in
activities designed to grow and retain deposits, including emphasizing relationship banking to new and existing
customers where borrowers are encouraged and normally expected to maintain deposit accounts with us; pricing
55
deposits at rate levels that will attract and/or retain deposits; and continually working to identify and introduce new
products that will attract customers or enhance our appeal as a primary provider of financial services.
As of December 31, 2023, the estimated uninsured deposits we held totaled approximately $3.7 billion. In addition,
we held $355.2 million in time deposits which, by account, were in excess of the the FDIC insurance limit of
$250,000. Of these accounts, there was a total of $187.6 million which was in excess of $250,000. This
assessment of time deposit accounts does not evaluate total deposit relationships, account ownership types or
other factors for determining the actual uninsured balances by customer.
The table below presents maturities of time deposits which by account are great than the FDIC insurance limit of
$250,000 as of December 31, 2023.
($ in thousands)
Time deposits greater than the FDIC
insurance limit of $250,000
3 Months
or Less
Over 3 to 6
Months
As of December 31, 2023
Over 6 to 12
Months
Over 12
Months
Total
$
151,321
98,241
91,210
14,437
355,209
In addition to insured deposits of $6.3 billion or 63.3% of total deposits, we had deposits collateralized by
investment securities with balances totaling $820.9 million at December 31, 2023 such that approximately 71.5% of
our total deposits were insured or collateralized at that date.
At each of the past three year ends, we had no deposits issued through foreign offices. Deposits at December 31,
2023 from foreign depositors were nominal.
Borrowings
We typically utilize short-term borrowings to provide balance sheet liquidity and to fund imbalances in our loan
growth compared to our deposit growth. In addition, we have long-term debt in the form of trust preferred securities
and subordinated debentures.
Total borrowings at December 31, 2023 increased $342.7 million from the prior year end. FHLB advances
comprised $59.0 million of the increase and FRB borrowings under the Bank Term Funding Program comprised
$249.0 million of the increase. The short-term advances were required to fund loan growth and fluctuations in
deposit balances during 2023. As a part of the GrandSouth acquisition, we acquired $8.2 million in trust preferred
securities and subordinated debentures totaling $28.0 million.
Our borrowings outstanding as of the dates presented were as follows:
($ in thousands)
FHLB advances
FRB borrowings
Trust preferred capital issuances
Subordinated debentures
Unamortized discounts on acquired borrowings
December 31,
2023
December 31,
2022
$
$
280,851
249,000
77,324
28,000
635,175
(5,017)
630,158
221,842
—
69,076
—
290,918
(3,411)
287,507
As noted in the table above, at December 31, 2023, we had $77.3 million of borrowings structured as trust preferred
capital securities which qualify as Tier I capital for regulatory capital adequacy requirements. The Company issued
$46.4 million of these securities with the balance assumed from several recent acquisitions, including GrandSouth
as noted above. The $28.0 million of unsecured subordinated debentures are borrowings issued by GrandSouth
which we acquired and which qualify as Tier II capital for regulatory capital adequacy requirements.
At December 31, 2023, the Company had several sources of readily available borrowing capacity:
•
A line of credit with the FHLB of approximately $1.3 billion which can be structured as either short-term or
long-term borrowings, depending on the particular funding or liquidity need, and is secured by a blanket lien
56
on most of our real estate loan portfolio, select securities from our investment portfolio, and our FHLB stock.
There was approximately $1.1 billion available under the FHLB line at year end based on pledged collateral.
•
•
•
Federal funds lines of credit from several correspondent banks totaling $265.0 million which provide for
overnight unsecured federal funds purchased, all of which was available at year end.
A $294.1 million line of credit through the Federal Reserve's Bank Term Funding Program ("BTFP"),
secured by specific investment securities, of which $45.1 million was available at year end. Effective March
11, 2024, the Federal Reserve will terminate the BTFP and no additional advances will be available.
A line of credit with the Federal Reserve through their discount window borrowing program of approximately
$561.6 million which is secured by a blanket lien on a portion of our commercial and consumer loan
portfolio (excluding real estate loans) and specific investment securities. All of this line was available at
year end.
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 has a high percentage of amortizing mortgage-backed securities generating monthly cash flows. In
addition, the portfolio is comprised almost entirely of readily marketable securities, which could also be sold to
provide cash. We also maintain available lines of credit from the FHLB and the Federal Reserve, as well as federal
funds lines from several correspondent banks which are summarized below.
At December 31, 2023, the Company had several sources of readily available borrowing capacity as described
above in the Borrowings section.
Liquidity is evaluated as both on-balance sheet (primarily cash and cash-equivalents, unpledged securities, and
other marketable assets) and off-balance sheet (readily available lines of credit or other funding sources). Our
overall on-balance sheet liquidity ratio was 14.6% at December 31, 2023. Our total liquidity ratio, including the $1.9
billion in available lines of credit, was 28.8% as of that date. The increase in available lines of credit during 2023
was a result of additional loan and security collateral being transferred to the FHLB and the Federal Reserve to
enhance the levels of off-balance sheet liquidity availability to meet demands, as necessary.
We continue to manage liquidity sources and 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. Certain of the outstanding commitments and contingent liabilities, such
as commitments to extend credit, are not reflected in the financial statements.
57
Presented below is a summary of our contractual obligations and other commercial commitments outstanding as of
December 31, 2023.
Contractual Obligations and Other Commercial Commitments
Contractual Obligation as of
December 31, 2023
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
$
Payments Due Per Period ($ in thousands)
Less
than 1 Year
$
529,048
2,446
1-3 Years
4-5 Years
After 5 Years
Total
101
3,547
10,702
2,626
95,324
17,222
635,175
25,841
901,211
62,739
13,902
843
978,695
524
9,953
48,491
1,491,673
1,125
9,953
15,966
93,431
1,153
—
14,998
43,381
4,442
—
7,244
19,906
38,587
156,418
118,042
1,784,903
(1) Represents forecasted interest expense on borrowings and time deposits based on interest rates and balances at
December 31, 2023. 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, 2023
Less
than 1 Year
Credit cards
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
$
$
—
380,237
19,508
399,745
1-3 Years
4-5 Years
After 5 Years
—
645,461
1,012
646,473
—
180,036
40
180,076
264,107
977,779
—
1,241,886
Total
Amounts
Committed
264,107
2,183,513
20,560
2,468,180
As presented in the table above, at December 31, 2023, we had $20.6 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. 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.
It has been our experience that deposit withdrawals are generally able to be replaced with new deposits when
needed, or through short-term advances from the FHLB. We believe that he Bank can meet its contractual cash
obligations and existing commitments from normal operations.
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2023 amounted to $1.4 billion compared to $1.0 billion at December 31,
2022. 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
such as in 2023, and any stock repurchases reduce shareholders’ equity. Finally, fluctuations in the amount of
AOCI, generally driven by market interest rate changes resulting in increases or decreases in unrealized gains/
losses on AFS securities, can have a significant impact on total equity. In 2023, the most significant factors that
impacted our shareholders' equity were (1) $229.5 million of common stock issued for the acquisition of GrandSouth
which increased equity; (2) $104.1 million net income reported for 2023, which increased equity, (3) common stock
dividends declared of $36.1 million, which reduced equity; and (4) $33.9 million reduction in equity related to
changes in AOCI driven by higher unrealized losses on AFS securities.
As discussed in “Borrowings” above, we also currently have $77.3 million in trust preferred securities outstanding,
all of which qualify as Tier I capital under regulatory standards and $28.0 million of unsecured subordinated
debentures which qualify as Tier II capital for regulatory capital adequacy requirements. 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.
58
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, 2023, approximately $1.1 billion of the Company’s
investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
Our regulatory capital ratios as of December 31, 2023, 2022 and 2021 are presented in the table below. All of our
capital ratios significantly exceeded the minimum regulatory thresholds for all periods presented.
Risk-Based and Leverage Capital Ratios
($ 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: Subordinated debentures eligible for Tier II capital treatment
Tier II capital additions
Total capital
Total risk weighted assets
2023
As of December 31,
2022
2021
$ 1,372,380
(493,383)
308,030
1,187,027
70,807
1,257,834
1,031,596
(363,202)
341,975
1,010,369
63,589
1,073,958
1,230,575
(366,609)
24,970
888,936
63,336
952,272
112,491
27,177
139,668
$ 1,397,502
97,126
—
97,126
1,171,084
88,692
—
88,692
1,040,964
$ 8,991,087
7,762,894
7,094,787
Adjusted fourth quarter average tangible assets
$ 11,532,812
10,215,571
10,144,760
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
13.20 %
13.99 %
15.54 %
10.91 %
13.02 %
13.83 %
15.09 %
10.51 %
12.53 %
13.42 %
14.67 %
9.39 %
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, 2023, our leverage ratio was 10.91% compared to the
regulatory well capitalized bank-level threshold of 4.00% and our total risk-based capital ratio was 15.54%
compared to the 10.50% regulatory well capitalized threshold. The increase in capital levels in 2023 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, which is a non-
GAAP financial measure. The TCE ratio was 7.42% at December 31, 2023 compared to 6.39% at December 31,
2022, with the increase of 103 basis points related primarily to the improvement in our AOCI unrealized loss on AFS
securities included in equity.
59
The following table reconciles common equity to tangible common equity and provides the calculation of the TCE
ratio:
($ in thousands)
Reconciliation of Common Equity to TCE
Total shareholders' common equity
Less: Goodwill and other intangibles
Tangible common equity
Reconciliation of Total Assets to Tangible Assets
Total assets
Less: Goodwill and other intangibles
Tangible assets
TCE divided by Tangible Assets
December 31,
2023
December 31,
2022
$ 1,372,380
1,031,596
(511,608)
(376,938)
$
860,772
654,658
$ 12,114,942
10,625,049
(511,608)
(376,938)
$ 11,603,334
10,248,111
7.42 %
6.39 %
See “Supervision and Regulation” under “Business” in Item 1. and Note 19 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 and subordinated debentures.
In the normal course of business, we are exposed to certain risk arising from both its business operations and
economic conditions. As an element of our risk management strategies, we may enter into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt or payment of future
known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial
instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with
similar characteristics.
We do not engage in significant derivatives activities, however, in 2023 to accommodate customers, we
implemented a program whereby we enter into interest rate swaps with certain commercial loan customers, with
offsetting positions to dealers under a back-to-back swap program. At December 31, 2023, the Company's
derivative financial instruments consist entirely of customer back-to-back interest rate swaps which are not
designated as hedges. Under this program, the Company executes interest rate swaps with commercial banking
customers to facilitate their risk management strategies. Those interest rate swaps are simultaneously
economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company
minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this
program are not designated as hedging instruments, changes in the fair value of both the customer derivatives and
the offsetting derivatives are recognized directly in earnings. Refer to Note 13 of the consolidated financial
statements for additional discussion of our derivative positions.
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.
60
Selected Financial Information
($ 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
2023
2022
2021
2020
2019
Year Ended December 31,
$ 488,759
142,101
346,658
19,750
(1,937)
328,845
57,490
254,379
131,956
27,825
104,131
$
2.54
2.53
0.88
43.24
26.48
37.01
33.38
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
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
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
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
Common shares outstanding at year end
41,109,987
35,704,154
35,629,177
28,579,335
29,601,264
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
$ 12,114,942
10,625,049
10,508,901
7,289,751
6,143,639
8,150,102
6,665,145
6,081,715
4,731,315
4,453,466
109,853
511,608
90,967
376,938
78,789
382,090
52,388
254,638
21,398
251,585
10,031,599
9,227,529
9,124,629
6,273,596
4,931,355
630,158
287,507
67,386
1,372,380
1,031,596
1,230,575
61,829
893,421
300,671
852,401
12,033,033
10,556,230
8,495,645
6,765,998
6,027,047
7,902,628
6,293,280
5,018,391
4,702,743
4,346,331
11,433,492
9,989,185
7,871,319
6,160,100
5,448,400
10,176,966
9,283,505
7,401,910
5,644,290
4,824,216
7,037,105
5,758,001
4,736,343
3,897,912
3,720,536
1,293,085
1,096,913
969,775
874,532
812,823
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
0.87%
8.05%
15.54%
3.06%
81.24%
1.35%
0.36%
1.39%
13.40%
15.09%
3.28%
72.23%
1.36%
0.36%
1.13%
9.86%
14.67%
3.16%
66.65%
1.30%
0.50%
1.20%
9.32%
15.37%
3.56%
75.42%
1.11%
0.64%
1.53%
11.32%
14.89%
4.00%
90.31%
0.48%
0.62%
Net (charge-offs) recoveries to average total loans
(0.08%)
(0.01%)
(0.05%)
(0.09%)
(0.04%)
Note - During both 2023 and 2021, the Company completed significant whole-bank acquisitions impacting the comparisons for each of those years. See
additional discussion under "Recent Developments and Acquisitions" in Item 1.
61
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 net interest income results from the difference between the yields we earn on our
interest-earning assets, primarily loans and investments, and the rates that we pay on our interest-bearing liabilities,
primarily deposits and borrowings. When interest rates change, the yields we earn on our interest-earning assets
and the rates we pay on our interest-bearing liabilities do not necessarily move in tandem with each other because
of the difference between their maturities and repricing characteristics and which can negatively impact net interest
income.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic
conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve.
Changes in monetary policy, including changes in interest rates, influence not only the interest we receive on loans
and investments and the amount of interest we pay on deposits and borrowings, but such changes could also affect
the average duration of our mortgage portfolio, investment securities and other interest-earning assets.
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 will generally impact our earnings adversely 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.
62
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.
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.
Change in Interest Rates (in basis points)
+ 400
+ 300
+ 200
+ 100
- 100
- 200
- 300
- 400
Percentage change in Net
Interest Income (1)
December 31,
2023
(6.1)%
(4.8)%
(3.5)%
(1.6)%
(3.6)%
(4.0)%
(3.8)%
(4.3)%
December 31,
2022
(1.4)%
(1.2)%
(1.0)%
(0.3)%
(1.5)%
(5.1)%
(10.1)%
(15.1)%
(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 with immediate and parallel shocks applied to the yield curve.
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. Starting in 2022 and continuing in 2023, the Company's sensitivity position shifted such that in the short-
term it is projected that net interest income will likely fall in both a rising and falling rate environment. This position
is due in part to the changing market characteristics of certain loan and deposit products as well as to the current
shape of the yield curve. The Company's current position is now more liability-sensitive which generally implies that
net interest income would be expected to rise in a falling rate environment and fall in a rising rate environment.
However, the rapid rate increases experienced beginning in 2022 through mid-2023 resulted in a steepening of the
yield curve on the short end (within one year), while the longer end of the curve inverted between one and ten
years, meaning that the yield on short-term instruments (less than one year) are higher than longer-term
instruments (ten 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.
In January 2022, due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal
Reserve announced, after several periods of historically low federal funds rates and yields on Treasury notes, that it
would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over
time. Therefore, the FOMC increased the target range eleven times throughout 2022 and 2023. As of December 31,
2023, the target range for the federal funds rate had been increased 525 basis points to 5.25% - 5.50%. It remains
uncertain whether the FOMC will further increase the target range for the federal funds rate to attain a monetary
policy sufficiently restrictive to return inflation to its target level, begin to reduce the federal funds rate or leave the
rate at its current elevated level for a lengthy period of time.
As demonstrated in the above table, we expect net interest income to decline in a rising interest rate environment,
as has been experienced over the last year. This is due in large part to the composition of our loan portfolio which
consists of approximately 19% variable rate loans that could immediately reprice, thus limiting the magnitude of the
impact of rate increases. In addition, the model includes an assumption of an immediate repricing up of the funding
base in a rising rate environment due to the current competitive deposit market, combined with a continued
utilization of wholesale funding in the form of short-term borrowings at our current level in order to maintain a similar
balance sheet composition which has led to a narrowing of the interest rate spread in the projection. With regard to
63
declining rates, assuming an immediate decrease or shock in market rates over the short-term (12-month horizon),
we also expect to realize a decline in net interest income, although not to the extent projected in the prior year. The
declining net interest income in a falling rate scenario is related to the repricing of interest-earning assets to lower
rates while non-maturity interest-bearing deposits are projected to be at or near their floor within a -200 basis point
shock, thus limiting our ability to keep pace with asset rate declines. The improvement in our position in the falling
rate scenario as compared to the prior year is related to the actual rate increases experienced in 2023 providing
additional repricing opportunity on the liability side of the balance sheet in a declining rate scenario. The model
results demonstrated in the above table are based on the immediate shock of each of the various rate scenarios
and assume a continued inversion of the yield curve (i.e. a parallel shift of the yield curve) in both a rising and falling
rate scenario.
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 and assumes a static average life
of deposits in all interest rate scenarios.
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.
Change in Interest Rates (in basis points)
+ 400
+ 300
+ 200
+ 100
- 100
- 200
- 300
- 400
Percentage change in Economic
Value of Equity (1)
December 31,
2023
(7.8)%
(6.0)%
(4.3)%
(1.4)%
0.2%
(2.7)%
(8.5)%
(18.6)%
December 31,
2022
(11.9)%
(8.9)%
(6.0)%
(2.3)%
0.7%
(2.4)%
(8.4)%
(18.2)%
(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 with immediate and parallel shocks applied to the yield curve.
As of December 31, 2023, the Company’s economic value of equity continued to be generally liability sensitive in
both a rising and falling interest rate environment, similar to its position as of December 31, 2022, while the extent of
exposure to rising rates has improved somewhat from the prior year end. The decline in EVE under a rising rate
environment is driven by the composition of the loans and investment portfolios, primarily related to CRE fixed rate
loans and fixed rate mortgage-back securities. In a rising rate environment, these portfolios tend to extend due to
slower prepayments, thus lowering their relative valuation in the EVE calculation. With regard to the falling rate
scenario, the non-maturity deposits, generally with lower betas, continue to be at or near floor rates assumed in the
model, thus within the -200 shocked interest rate scenario, essentially all on the non-maturity deposits are at or near
their floor thus negatively impacting their value in the EVE calculation while variable rate assets continue to price
downward in all falling rate scenarios. Refer also to the discussion above under Earnings Simulation Analysis.
64
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.
65
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2023 and 2022
($ 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 $449,623 in 2023 and $432,528 in 2022)
Presold mortgages and SBA loans in process of settlement
Loans
Allowance for credit losses on loans
Net loans
Premises and equipment, net
Operating right-of-use lease assets
Accrued interest receivable
Goodwill
Other intangible assets, net
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 2023 and 2022
Common stock, no par value per share. Authorized: 60,000,000 shares
Issued & outstanding: 41,109,987 shares in 2023 and 35,704,154 shares in 2022
Retained earnings
Stock in rabbi trust assumed in acquisition
Rabbi trust obligation
Accumulated other comprehensive loss
Total shareholders’ equity
2023
2022
$
100,891
136,964
237,855
2,189,379
533,678
101,133
169,185
270,318
2,314,493
541,700
2,667
1,282
8,150,102
(109,853)
8,040,249
6,665,145
(90,967)
6,574,178
150,957
17,063
37,351
478,750
32,858
183,897
210,238
134,187
18,733
29,710
364,263
12,675
164,592
198,918
$
12,114,942
10,625,049
$
3,379,876
6,651,723
10,031,599
630,158
5,699
17,833
57,273
3,566,003
5,661,526
9,227,529
287,507
2,738
19,391
56,288
10,742,562
9,593,453
—
—
963,990
716,420
(1,385)
1,385
(308,030)
1,372,380
725,153
648,418
(1,585)
1,585
(341,975)
1,031,596
Total liabilities and shareholders’ equity
$
12,114,942
10,625,049
See accompanying notes to consolidated financial statements.
66
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2023, 2022 and 2021
2023
2022
2021
$
418,668
278,027
219,013
52,276
4,485
13,330
488,759
114,866
27,235
142,101
346,658
19,750
(1,937)
17,813
328,845
16,800
22,270
1,613
5,503
1,803
2,489
4,350
—
2,662
57,490
114,377
25,474
139,851
14,963
6,027
13,695
8,003
71,840
254,379
131,956
27,825
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
50,142
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
45,011
184,656
120,319
24,675
$
$
104,131
146,936
95,644
2.54
2.53
4.12
4.12
3.19
3.19
40,746,772
41,164,834
35,485,620
35,674,730
29,876,151
30,027,785
($ 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
Presold mortgage loan gains
Commissions from sales of insurance and financial products
SBA consulting fees
SBA loan sale gains
Bank-owned life insurance income
Securities losses, net
Other gains, net
Total noninterest income
Noninterest Expense
Salaries
Employee benefits
Total personnel expense
Occupancy expense
Equipment related expenses
Merger and acquisition expenses
Intangibles amortization
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
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
67
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2023, 2022 and 2021
($ in thousands)
Net income
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, pretax
Tax (expense) benefit
Reclassification to realized losses
Tax benefit
Postretirement plans:
Net (gains) losses arising during period
Tax expense (benefit)
Amortization of unrecognized net actuarial (gains) losses
Tax expense (benefit)
Reclassification of net actuarial losses due to settlement to realized losses
Tax benefit
Other comprehensive income (loss)
Comprehensive income (loss)
See accompanying notes to consolidated financial statements.
2023
2022
2021
$
104,131
146,936
95,644
43,343
(9,279)
—
—
(607)
141
(545)
126
998
(232)
(411,996)
94,677
—
—
695
(159)
(288)
66
—
—
(53,752)
12,352
1,237
(284)
872
(201)
592
(136)
—
—
33,945
138,076
$
(317,005)
(170,069)
(39,320)
56,324
68
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2023, 2022 and 2021
Common Stock
Shares
Amount
Retained
Earnings
Stock in
rabbi trust
assumed in
acquisition
Rabbi trust
obligation
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
28,579 $ 400,582
478,489
(2,243)
2,243
14,350
893,421
(17,051)
95,644
(24,208)
440
(440)
(17,051)
95,644
(24,208)
—
324,389
(4,036)
(786)
2,522
(39,320)
(39,320)
7,070
(107)
324,389
(4,036)
(18)
105
(786)
2,522
($ in thousands, except per
share data)
Balances, January 1, 2021
Adoption of new accounting
standard
Net income
Cash dividends declared ($0.80
per common share)
Change in Rabbi Trust
Obligation
Equity issued pursuant to
acquisition
Stock repurchases
Stock withheld for payment of
taxes
Stock-based compensation
Other comprehensive income
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
Net income
Cash dividends declared ($0.88
per common share)
Change in Rabbi Trust
Obligation
Equity issued pursuant to
acquisition
Stock option exercises
Stock withheld for payment of
taxes
Stock-based compensation
Other comprehensive loss
5,033
237
229,489
4,519
(23)
159
(743)
5,572
104,131
(36,129)
200
(200)
104,131
(36,129)
—
229,489
4,519
(743)
5,572
33,945
33,945
Balances, December 31, 2023
41,110 $ 963,990
716,420
(1,385)
1,385
(308,030)
1,372,380
See accompanying notes to consolidated financial statements.
69
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2023, 2022 and 2021
($ in thousands)
Cash Flows From Operating Activities
Net income
Reconciliation of net income to net cash provided by operating activities:
Provision for credit losses and unfunded commitments, net
Net security premium amortization
Deferred tax benefit
Loan discount accretion
Deposit and debt discount (premium) accretion (amortization), net
Foreclosed property (gains) losses/write-downs, net
Losses on sales of securities available for sale, net
Other gains, net
Bank-owned life insurance income
Net amortization of 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 and impairment 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, calls and principal repayments of securities available for sale
Proceeds from maturities, calls and principal repayments of securities held to maturity
Proceeds from sales of securities available for sale
Purchases of Federal Reserve and FHLB stock
Redemptions of Federal Reserve and FHLB stock
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 in acquisition activities
Net cash received in disposition activities
Net cash used by investing activities
Cash Flows From Financing Activities
Net (decrease) increase in deposits
Advances from other borrowings
Repayment of other borrowings
Cash dividends paid – common stock
Repurchases of common stock
Proceeds from stock option exercises
Payment of taxes related to stock withheld
Net cash provided by financing activities
(Decrease) increase in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
2023
2022
2021
$
104,131
146,936
95,644
17,813
9,337
(782)
(13,277)
3,943
(150)
—
(1,857)
(4,350)
(1,225)
7,754
2,100
(1,988)
5,125
8,003
1,356
(4,102)
(84,696)
84,957
(52,787)
39,930
(1,904)
12,435
2,579
(949)
131,396
(1,169)
—
165,358
3,453
111,863
(58,688)
43,797
—
137
(9,754)
(466,488)
967
(4,421)
970
22,610
—
(191,365)
(244,339)
3,348,000
(3,044,991)
(34,940)
—
4,519
(743)
27,506
(32,463)
270,318
237,855
$
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
—
(48,159)
30,915
—
8,312
(7,990)
(558,398)
2,904
(5,287)
299
—
—
(713,359)
103,494
1,252,000
(1,032,133)
(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
(93)
2,136
(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
(Continued)
70
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2023, 2022 and 2021
(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: Unrealized gain (loss) on securities available for sale, net of taxes
Non-cash: Foreclosed loans transferred to foreclosed real estate
Non-cash: Accrued dividends at period end
Non-cash: Initial recognition of operating lease right-of-use assets and liabilities
Non-cash: Revision of operating lease right-of-use assets and operating lease liabilities
Non-cash: Derecognition of intangible assets related to sale of insurance operations
Acquisition of GrandSouth Bancorporation
See accompanying notes to consolidated financial statements.
2023
2022
2021
$
135,704
29,734
34,064
1,036
9,046
260
(562)
—
See Note 2
14,312
39,722
(317,319)
119
7,857
—
—
—
—
10,206
32,506
(41,400)
2,285
7,125
2,191
—
(10,229)
—
71
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2023
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 2022 and 2021 consolidated financial statements to be comparable to 2023. These reclassifications
had no effect on net income. Subsequent events have been evaluated through the date of filing this Annual Report
Form 10-K.
Use of Estimates – 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
materially 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 unfunded commitments, the accounting and impairment testing related to intangible assets, the fair value
determination for acquired assets and liabilities, and the resulting accretion or amortization of purchase accounting
premiums or discounts.
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.
72
Allowance for Credit Losses ("ACL") - Securities Held to Maturity - The Company measures expected credit
losses on HTM debt securities on a pooled basis in accordance with Accounting Standards Codification ("ASC") 326
("CECL"). 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 ("GSEs"). These securities are either explicitly guaranteed by the U.S.
government or guaranteed by GSEs that have credit ratings and perceived credit risk comparable to 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 $4.2 million and $4.3 million at December 31, 2023 and December 31, 2022,
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 on AFS securities 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 ACL 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 $5.2 million and $5.7 million at December 31, 2023 and December 31, 2022,
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. Loans are transferred to the investor in a short
period following funding 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.
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
$28.0 million at December 31, 2023 and $19.7 million at December 31, 2022, and was reported in accrued interest
receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized in interest income using
methods that approximate a level yield without anticipating prepayments.
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. 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. 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
73
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") - 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. The initial amortized cost of PCD loans
is determined by reducing the loans par value by the initial ACL, with any difference between the resulting amount
and the loans purchase price or acquisition date fair value recorded as a non-credit-related 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.
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,
reasonable and supportable forecasts, 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.
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.
•
• 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. The Company generally requires loan to value of 80% or lower and debt service
coverage of 1.30x or better. Terms outside of these guidelines will have strengths to mitigate additional risk.
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. The
Company generally requires loan to value of 80% or lower, debt service coverage of 1.30x or better and
overall lease terms to match or extend beyond the term of the loan.
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.
The Company generally requires a debt-to-income below 40% on all home equity lines of credit with loan to
•
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•
•
•
value generally 80% or less and a minimum credit score of 660. Portfolio mortgage loans will vary
depending on the product, but generally require credit scores of 640 or greater, debt to income below 50%
and loan to value maximum of 90%.
Construction and land development loans - This pool includes 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. Residential construction
loans for resale generally have a loan to value of 85% or lower. Loan to value would generally be under
80% for commercial speculative construction projects. Owner occupied and non-owner occupied
commercial construction projects are underwritten to standard guidelines discussed above.
Commercial and industrial loans - These 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.
Commercial and Industrial loans generally require debt service coverage of 1.25x or better. The Company
typically limits equipment and accounts receivable to loan to value of 80% and eligible inventory limited to
40% loan to value.
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. The Company generally limits consumer loans to those clients with a
minimum 660 credit score and debt-to-income below 40%. Loan to value will vary based on the collateral
type and useful life.
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 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 forecast to use for macroeconomic factors in the model.
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 (unfunded commitments) 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 unfunded commitments, which is reflected within "Other liabilities" on the consolidated
balance sheets is adjusted for as an increase or decrease to the provision for credit losses for unfunded
commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of
expected credit losses on commitments expected to be funded over its estimated life. The allowance is calculated
75
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.
Financial Difficulty Modifications ("FDM") - A loan that is refinanced or restructured by the Company when a
borrower is experiencing financial difficulty is generally considered a FDM. Such modification is evaluated to
determine if the changes to the loan result in a new loan or a continuation of the existing loan, and to determine the
appropriate treatment of deferred loan fees/costs, (i.e. to recognize in income if considered a new loan or to
continue amortization if determined to be a continuation of the loan). The ACL on a FDM is measured using the
same method as all other loans held for investment. FDMs that share similar risk characteristics and consistently
discounted based on the post-modification effective rate.
Troubled Debt Restructurings ("TDR") - Prior to the adoption of Accounting Standards Update ("ASU") 2022-02
on January 1, 2023, a TDR was generally considered a loan for which the terms were modified resulting in a more
than insignificant concession, and for which the borrower was experiencing financial difficulties. The ACL on a TDR
was measured using the same method as all other loans held for investment, except that the original interest rate
was used to discount the expected cash flows, not the rate specified within the restructuring.
Small Business Administration ("SBA") Loans Held for Sale and SBA Retained Loan Discount – All SBA
loans originated 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 may be classified as held for sale if the Company
intends to sell them in the near future and generally has acceptable bids for such loans. SBA loans classified as
held for sale 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.
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 asset amortization expense is recorded in noninterest
income as an offset to SBA servicing fees within the line item "Other service charges, commissions and fees" on the
consolidated statement of income. 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. Recorded
within noninterest expense as "Occupancy expense" on the consolidated statements of income, 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 and are recorded within noninterest expense on the "Other operating expenses" line on the consolidated
statements of income.
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Goodwill and Other Intangible Assets - Business combinations are accounted for using the acquisition method of
accounting. Identifiable intangible assets, primarily core deposit intangibles ("CDI"), 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
recorded within noninterest expense on the "Other operating expenses" line in the consolidated statements of
income. Capital expenditures made to improve the property are capitalized. Costs of holding real estate, such as
property taxes, insurance, and maintenance, less related revenues during the holding period, are recorded as
expense as they are incurred. Foreclosed properties are included in the "Other assets" line on the consolidated
balance sheets and totaled $0.9 million and $0.7 million at December 31, 2023 and 2022, respectively.
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” on the consolidated
statements of 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 more likely
than 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, recorded within noninterest income as
"Other gains, net" on the consolidated statements of income. 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, 2023 and 2022, the Company’s investments in limited partnerships and LLCs totaled $27.6 million
and $18.5 million, respectively, and are included in "Other assets" on the consolidated balance sheets.
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" on the consolidated balance sheets. Cash dividends are reported as
income, recorded within interest income in the "Other, principally overnight investments" line on the consolidated
statements of income.
Federal Reserve Bank ("Federal Reserve", "FRB") 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
77
recorded in "Other assets" on the consolidated balance sheets. Cash dividends are reported as income, recorded
within interest income in the "Other, principally overnight investments" line on the consolidated statements of
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.
Leases - The Company leases certain branch locations and administrative offices which are generally classified as
operating leases with right-of-use assets being included in other assets and the associated lease obligations being
included in other liabilities. For leases where the Company is the lessee that have initial terms greater than one
year, right-of-use assets and corresponding lease liabilities are reported on the balance sheet. Leases with an initial
term of less than one year are not recorded on the balance sheet, rather, the Company recognizes lease expense
for these leases on a straight-line basis over the lease term. Operating lease expense is recognized on a straight-
line basis over the lease term and included in "Occupancy expense" on the consolidated statements of income.
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 ("EPS") Amounts - Basic EPS is calculated by dividing net income, less income allocated to
participating securities, by the weighted average number of common shares outstanding during the period,
excluding unvested shares of restricted stock. For the Company, participating securities are comprised of unvested
shares of restricted stock. Diluted EPS 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, dilutive stock options and
contingently issuable shares which are determined using the treasury stock method. 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 14. 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.
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 unit to its related carrying value. 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.
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Comprehensive Income (Loss) - Comprehensive income (loss) includes revenues, expenses, gains, and losses
that are excluded from earnings under current accounting standards, primarily unrealized gain (loss) on available for
sale securities and unrealized and realized gains and losses on postretirement benefit plans.
Variable Interest Entities - The Company's statutory trust subsidiaries (First Bancorp Capital Trust II, Trust III and
Trust IV, Carolina Capital Trust, New Century Statutory Trust I, and GrandSouth Capital Trust I), (collectively "the
Trusts") qualify as variable interest entities. 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.
Derivative Instruments and Hedging Activities - The Company occasionally enters into derivative financial
instruments as part of its interest rate risk management strategies. These derivative financial instruments consist
primarily of interest rate swaps to accommodate certain commercial loan customers, with offsetting positions to
dealers under a back-to-back swap program. All derivative instruments are recorded on the consolidated balance
sheets as either an asset (included in "Other assets") or liability (included in "Other liabilities") at their fair value.
The Company has master netting agreements with the counterparties with which it does business, but reflects gross
assets and liabilities at fair value on the consolidated balance sheets.
The accounting for the gain or loss resulting from the change in fair value depends on the intended use of the
derivative. The Company classifies its derivative financial instruments as either (1) a hedge of an exposure to
changes in the fair value of a recorded asset or liability (“fair value hedge”), (2) a hedge of an exposure to changes
in the cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”), or (3) derivatives not
designated as accounting hedges ("undesignated hedges"). As of December 31, 2023, the Company has only
entered into derivatives classified as undesignated hedges for which changes in fair value are recognized in current
period earnings in either noninterest income or noninterest expense.
The Company also originates certain residential mortgage loans with the intention of selling these loans. The
Company enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan
sale. The commitments to originate residential mortgage loans and forward loan sales commitments are
freestanding derivative instruments which are entered into as part of an economic hedging strategy to manage
exposure related to mortgage loans held for sale.
Recent Accounting Pronouncements
Accounting Standards Adopted in 2023
ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage
Disclosures." The amendments contained in this ASU eliminate the accounting guidance for TDRs 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. The Company adopted ASU 2022-02 effective January 1, 2023
using a modified retrospective transition approach for the amendments related to the recognition and measurement
of TDRs. The impact of the adoption resulted in an immaterial change to the ACL, thus no adjustment to retained
earnings was recorded. Disclosures have been updated in Note 4 to comply with the ASU as required. In addition,
TDR disclosures are presented in Note 4 for comparative periods only and are not required to be updated in current
periods.
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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 Company adopted ASU 2022-03 January 1, 2023 with no material impact on its financial statements.
ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." ASU 2022-06
deferred the sunset date of the London Interbank Offered Rate ("LIBOR") to December 31, 2024, after which entities
will no longer be permitted to apply the relief prescribed in ASU 2020-04, Reference Rate Reform (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. ASU 2022-06 was adopted in the third quarter of 2023 with no material effect on its financial
statements.
Accounting Standards Pending Adoption
ASU 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax
Credit Structures Using the Proportional Amortization Method” permits reporting entities to elect to account for their
tax equity investments, regardless of the tax credit program from which the income tax credits are received, using
the proportional amortization method if certain conditions are met. This update is effective for fiscal years beginning
after December 15, 2023, including interim periods within those fiscal years. The adoption of ASU 2023-02 is not
expected to have a significant impact on the Company's consolidated financial statements.
ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" amended
existing guidance to improve disclosures about a public entity’s reportable segments and provide more detailed
information about a reportable segment’s expenses. ASU 2023-07 clarifies that an entity which has a single
reportable segment is to provide all the disclosures required by Topic 280 and ASU 2023-07. The amendment is
effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after
December 15, 2024. The adoption of ASU 2023-07 is not expected to have a significant impact on the Company's
consolidated financial statements.
ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” amended existing guidance
to improve the transparency of income tax disclosures, including disclosure of specific categories in the rate
reconciliation, providing additional information for certain reconciling items, and providing details on income taxes
paid. The amendments are effective for annual periods beginning after December 15, 2024. The adoption of ASU
2023-09 is not expected to have a significant impact on the Company's consolidated financial statements.
Other accounting standards that have been issued or proposed by the Financial Accounting Standards Board,
("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
On January 1, 2023, the Company completed its acquisition of 100% of GrandSouth Bancorporation
("GrandSouth"), in an all-stock transaction pursuant to the 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. The results of GrandSouth are included beginning on the January 1, 2023 acquisition date.
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, GrandSouth common stock options outstanding at the merger effective time
were converted to options to acquire 0.91 shares of the Company's common stock resulting in 542,345 options with
an average exercise price of approximately $20.14. The total consideration transferred at the close of the
transaction was $229.5 million which was determined based on the number of shares issued and the closing market
price of the Company's stock immediately prior to the merger effective time of $42.84. In addition to the stock
issued, the fair value of the converted stock options calculated in accordance with ASC 805-30-55 was included in
the total consideration of the transaction.
80
As a result of the merger, eight branches in South Carolina were added to the Company's branch network. The
acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in
the high-growth markets of the state including Greenville, Charleston and Columbia. Significant synergies were
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 recognized goodwill in the transaction
related primarily to the reasons noted, as well as the positive earnings of GrandSouth.
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 GrandSouth were recorded
based on estimates of fair values as of January 1, 2023. 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. Management has finalized the valuations of all acquired assets and liabilities assumed in the
GrandSouth acquisition.
The following table summarizes the estimated fair value of acquired assets, identified intangible assets, and
liabilities assumed as of January 1, 2023. Following the table is a discussion of valuation approaches utilized in
estimating the fair values. The $114.5 million in goodwill that resulted from this transaction is non-deductible for tax
purposes.
($ in thousands)
Assets acquired:
Cash and cash equivalents
Securities available for sale
Loans, gross
Allowance for credit losses
Premises and equipment
Core deposit intangible
Operating right-of-use assets
Other assets
Total
Liabilities assumed:
Deposits
Borrowings
Other liabilities
Total
Net identifiable assets acquired
Less: Total consideration
Goodwill recorded related to acquisition of GrandSouth
Fair Value
Estimate
$
$
22,610
112,363
996,833
(5,610)
20,268
28,840
732
27,163
1,203,199
1,045,308
38,800
4,089
1,088,197
115,002
229,489
114,487
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 cash equivalents: This consists primarily of 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. Substantially all of the
securities acquired from GrandSouth were liquidated at their recorded fair value upon close of the transaction or
shortly thereafter. There was no gain or loss recorded on the sale of acquired securities.
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
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management's assessment of credit risk for allowance measurement, including estimated future credit losses and
estimated prepayments. A total fair value mark of $29.5 million was recorded. PCD loans were determined based
primarily on internal grades, delinquency status, and other evidence of credit deterioration. The Company calculated
the initial allowance of $5.6 million on PCD loans in accordance with its CECL model and reclassified that amount
from the fair value mark to establish the initial ACL on PCD loans. The following table presents additional
information related to the acquired loan portfolio at the acquisition date:
($ 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
January 1,
2023
$
152,487
(5,610)
(1,370)
145,507
845,716
865,132
22,542
Premises: Land and buildings held for use were valued at appraised values, which reflected considerations of
recent disposition values for similar property types with adjustments for characteristics of individual properties.
Intangible assets: The CDI asset represents the value of the relationships with deposit customers. The fair value for
the CDI 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 were
based on market rates. The CDI is being amortized over ten years utilizing the sum of the months digits accelerated
method, which results in a weighted-average amortization period of approximately 41 months.
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.
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 GrandSouth had been acquired on January 1, 2022.
These results combine the historical results of GrandSouth 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, 2022.
Merger-related costs related to this acquisition of $13.7 million for 2023 were recorded by the Company and 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 GrandSouth in the amount of $2.2 million for 2022.
Pro forma information for the year 2023 was adjusted to eliminate the following: 1) the non-PCD provision for loan
losses recorded on the acquisition date of $12.2 million and 2) the initial recording of a provision for credit losses
associated with GrandSouth’s unfunded commitments of $1.9 million. If the GrandSouth acquisition had occurred at
the beginning of 2022, the acquisition date credit loss reserve amounts would have been included in the fair value
measurements of GrandSouth and also included in the goodwill calculation.
82
The following table also discloses the impact of the acquisition of GrandSouth from the acquisition date of January
1, 2023 through December 31, 2023. These amounts are included in the Company’s consolidated financial
statements as of and for the year ended December 31, 2023. Merger-related costs have been excluded from these
amounts and the provisions for credit loss amounts associated with non-PCD loans and unfunded commitments that
were discussed above have also been excluded.
($ in thousands, unaudited)
Year Ended December 31, 2023
Actual GrandSouth results included in statement of income since acquisition date
Revenue
Net Income
$
58,301 $
22,058
Year Ended December 31, 2022
Supplemental consolidated pro forma as if GrandSouth had been acquired on January 1,
2022
454,579
161,826
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2023 and 2022 are
summarized as follows:
2023
2022
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
Amortized
Cost
Fair
Value
Unrealized
Gains
(Losses)
($ in thousands)
Securities available for sale:
US Treasury securities
Government-sponsored
enterprise securities
Mortgage-backed
$ 174,785
172,570
71,964
60,266
Corporate bonds
securities
1,937,784
18,759
Total available for sale $ 2,590,099 2,189,379
2,323,674
19,676
Securities held to maturity:
Mortgage-backed
securities
State and local
governments
Total held to maturity
$ 12,085
11,447
521,593
$ 533,678
438,176
449,623
—
—
30
—
30
—
39
39
(2,215) 174,420
168,758
—
(5,662)
(11,698)
71,957
57,456
—
(14,501)
(385,920) 2,467,839
44,340
(400,750) 2,758,556
(917)
2,045,000
43,279
2,314,493
4
—
4
(422,843)
(1,061)
(444,067)
(638)
15,150
14,221
—
(929)
(83,456) 526,550
(84,094) 541,700
418,307
432,528
7
7
(108,250)
(109,179)
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 $0.7 million and $0.8 million as of December 31,
2023 and 2022, respectively.
83
The following table presents information regarding securities with unrealized losses at December 31, 2023:
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
($ in thousands)
US Treasury securities
Fair Value
$
—
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
State and local governments
Total temporarily impaired
securities
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
—
—
5
—
—
172,570
2,215
172,570
2,215
60,266
1,945,830
11,698
386,553
60,266
1,946,947
17,008
917
17,008
11,698
386,558
917
432,476
83,456
432,476
83,456
—
1,117
—
—
$
1,117
5
2,628,150
484,839
2,629,267
484,844
The following table presents information regarding securities with unrealized losses at December 31, 2022:
($ in thousands)
US Treasury securities
Government-sponsored enterprise
securities
Mortgage-backed securities
Corporate bonds
State and local governments
Total temporarily impaired
securities
Securities in an Unrealized
Loss Position for
Less than 12 Months
Securities in an Unrealized
Loss Position for
More than 12 Months
Total
Fair Value
$ 168,758
—
221,006
40,644
48,385
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
5,662
—
18,215
947
8,323
—
—
168,758
5,662
57,456
1,835,958
886
368,897
14,501
405,557
114
99,927
57,456
2,056,964
41,530
417,282
14,501
423,772
1,061
108,250
$ 478,793
33,147
2,263,197
520,099
2,741,990
553,246
As of December 31, 2023, the Company's securities portfolio held 657 securities of which 632 securities were in an
unrealized loss position. As of December 31, 2022, the Company's securities portfolio held 666 securities of which
644 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, 2023 and 2022 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 any one state or local government entity. Nearly all of the
Company's mortgage-backed securities were issued by Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA"), Government National Mortgage Association ("GNMA"), or 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, 2023 and 2022, the Company determined that expected credit losses associated with HTM
securities and AFS debt securities were insignificant.
84
The book values and approximate fair values of investment securities at December 31, 2023, by contractual
maturity, are summarized in the table below. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands)
Debt securities
Due within one year
Due after one year but within five years
Due after five years but within ten years
Due after ten years
Mortgage-backed securities
Total securities
Securities Available for Sale
Amortized
Cost
Fair
Value
Securities Held to Maturity
Amortized
Cost
Fair
Value
$
$
177,290
10,000
78,135
1,000
2,323,674
2,590,099
174,976
8,602
67,018
999
1,937,784
2,189,379
—
1,998
129,097
390,498
12,085
533,678
—
1,797
110,785
325,594
11,447
449,623
At December 31, 2023 and 2022, investment securities with carrying values of $971.3 million and $758.0 million,
respectively, were pledged as collateral for public deposits. In addition, at December 31, 2023 and 2022, investment
securities with carrying values of $679.0 million and zero, respectively, were pledged as collateral for FRB
borrowings.
At December 31, 2023 and 2022, 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 2023 and 2022, there were no sales of investment securities with the exception of securities acquired from
GrandSouth in 2023 which were subsequently liquidated as discussed in Note 2. There was no gain or loss
associated with the sale of acquired securities. In 2021, the Company received proceeds from sales of securities of
$106.5 million and recorded $1.2 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 $54.5 million and $39.6 million at December 31, 2023 and 2022, respectively. These investments do not
have readily determinable fair values. The FHLB stock had a cost and fair value of $21.7 million and $14.7 million
at December 31, 2023 and 2022, 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 $32.8 million and $24.9 million at December 31, 2023 and 2022, respectively, and is a
requirement for Federal Reserve member bank qualification. Periodically, both the FHLB and Federal Reserve
recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a
portion of the stock at cost. The Company determined that neither stock was impaired at either period end.
The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public
offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain
litigation against Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the
conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at
December 31, 2023 was approximately 1.59, which means the Company would receive approximately 19,615 Class
A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value
and is carried at zero. If a readily determinable fair value becomes available for the Class B shares, or upon the
conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a
credit to earnings.
85
Note 4. Loans, Allowance for Credit Losses, and Asset Quality Information
The following is a summary of the major categories of total loans outstanding:
($ in thousands)
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Subtotal
Unamortized net deferred loan fees
Total loans
December 31, 2023
December 31, 2022
Amount
Percentage
Amount
Percentage
$
$
905,862
992,980
1,259,022
2,528,060
421,376
1,639,469
335,068
68,443
8,150,280
(178)
8,150,102
11 %
12 %
16 %
31 %
5 %
20 %
4 %
1 %
100 %
641,941
934,176
1,036,270
2,123,811
350,180
1,195,785
323,726
60,659
6,666,548
(1,403)
6,665,145
9 %
14 %
16 %
32 %
5 %
18 %
5 %
1 %
100 %
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,
2023
December 31,
2022
$
$
$
35,462
107,784
143,246
31,893
116,910
148,803
349,275
392,370
At December 31, 2023 and December 31, 2022, there were remaining unaccreted discounts on the retained portion
of sold SBA loans amounting to $3.5 million and $4.3 million respectively.
At December 31, 2023 and December 31, 2022, loans in the amount of $6.5 billion and $5.3 billion, respectively,
were pledged as collateral for certain borrowings. Refer to Note 9 for further discussion.
At December 31, 2023 and 2022, total loans included loans to executive officers and directors of the Company, and
their associates, totaling approximately $63.7 million and $6.0 million, respectively. There were nine new loans and
advances on existing loans totaling approximately $58.5 million for the year ended December 31, 2023 and
repayments amounted to $0.8 million for that period. Available credit on related party loans totaled $2.7 million and
$1.2 million at December 31, 2023 and December 31, 2022, respectively.
As of December 31, 2023 and 2022, unamortized discounts on all acquired loans totaled $24.0 million and $11.6
million, respectively. Loan discounts are generally amortized as yield adjustments over the respective lives of the
loans, while the loans perform.
86
Nonperforming assets ("NPAs") are defined as nonaccrual loans, FDMs, loans past due 90 or more days and still
accruing interest, foreclosed real estate, and prior to the adoption of ASU 2022-02 on January 1, 2023, TDRs.
The following table summarizes the NPAs for each period presented:
($ in thousands)
Nonperforming assets
Nonaccrual loans
Modifications to borrowers in financial distress
TDRs - accruing
Total nonperforming loans
Foreclosed properties
Total nonperforming assets
December 31,
2023
December 31,
2022
$
$
32,208
11,719
—
43,927
862
44,789
28,514
—
9,121
37,635
658
38,293
At December 31, 2023 and 2022, the Company had $1.0 million and $0.8 million in residential mortgage loans in
process of foreclosure, respectively.
At December 31, 2023 and December 31, 2022, there was one loan with an immaterial commitment to lend
additional funds to borrowers whose loans were nonperforming.
The following table is a summary of the Company’s nonaccrual loans by major categories for the year ended
December 31, 2023.
($ in thousands)
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
Nonaccrual
Loans with No
Allowance
Nonaccrual
Loans with an
Allowance
Total
Nonaccrual
Loans
$
$
944
—
960
6,121
—
534
—
8,559
8,932
399
6,082
1,082
4,843
2,169
142
23,649
9,876
399
7,042
7,203
4,843
2,703
142
32,208
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 and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
Nonaccrual
Loans with No
Allowance
Nonaccrual
Loans with an
Allowance
Total
Nonaccrual
Loans
$
$
3,855
—
3,903
1,107
157
—
—
9,022
6,374
1,009
5,770
1,725
3,132
1,397
85
19,492
10,229
1,009
9,673
2,832
3,289
1,397
85
28,514
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.
87
The following table represents the accrued interest receivables written off by reversing interest income for the
periods indicate.
($ in thousands)
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
Year Ended
December 31,
2023
Year Ended
December 31,
2022
$
$
225
10
124
186
38
57
2
642
102
16
124
15
45
20
2
324
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2023.
($ in thousands)
Commercial and industrial
Construction, development & other
land loans
Commercial real estate - owner
occupied
Commercial real estate - non
owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
$
Unamortized net deferred loan fees
Total loans
Accruing
30-59 Days
Past Due
$
3,726
241
906
361
—
18,868
603
270
24,975
Accruing
60-
89 Days
Past Due
Accruing 90
Days or
More
Past Due
257
256
404
—
—
3,401
349
131
4,798
—
—
—
—
—
—
—
—
—
Nonaccrual
Loans
Accruing
Current
9,876
892,003
Total Loans
Receivable
905,862
399
992,084
992,980
7,042
1,250,670
1,259,022
7,203
—
4,843
2,703
142
32,208
2,520,496
421,376
1,612,357
331,413
67,900
8,088,299
2,528,060
421,376
1,639,469
335,068
68,443
8,150,280
(178)
$ 8,150,102
88
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2022.
($ in thousands)
Commercial and industrial
Construction, development & other
land loans
Commercial real estate - owner
occupied
Commercial real estate - non
owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
$
Unamortized net deferred loan (fees) costs
Total loans
Accruing
30-59 Days
Past Due
$
438
238
124
496
—
3,415
457
249
5,417
Accruing
60-
89 Days
Past Due
Accruing 90
Days or
More
Past Due
565
1,687
48
49
—
25
371
66
2,811
—
—
—
—
—
—
—
—
—
Nonaccrual
Loans
Accruing
Current
10,229
630,709
Total Loans
Receivable
641,941
1,009
931,242
934,176
9,673
1,026,425
1,036,270
2,832
—
3,289
1,397
85
28,514
2,120,434
350,180
1,189,056
321,501
60,259
6,629,806
2,123,811
350,180
1,195,785
323,726
60,659
6,666,548
(1,403)
$ 6,665,145
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 $500,000 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
$500,000 in size that management of the Company designates as having higher risk. These loans do not share
common risk characteristics and are not included within the collectively evaluated loans for determining the ACL.
The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2023.
($ in thousands)
Commercial and industrial
Commercial real estate - owner
occupied
Commercial real estate - non owner
occupied
Home equity loans/lines of credit
Total
$
$
Residential
Property
Business
Assets
Land
Commercial
Property
—
—
—
534
534
2,385
—
—
—
2,385
—
—
—
—
—
—
1,142
6,121
—
7,263
Total
Collateral-
Dependent
Loans
2,385
1,142
6,121
534
10,182
The following table presents an analysis of collateral-dependent loans of the Company as of December 31, 2022.
($ in thousands)
Commercial and industrial
Commercial real estate - owner
occupied
Commercial real estate - non owner
occupied
Residential 1-4 family real estate
Total
$
$
Residential
Property
Business
Assets
Land
Commercial
Property
—
—
—
157
157
6,394
—
—
—
6,394
—
—
—
—
—
—
4,578
2,145
—
6,723
Total
Collateral-
Dependent
Loans
6,394
4,578
2,145
157
13,274
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.
89
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. There is no significant
over-coverage of collateral for any of the loan types noted above.
Fluctuations in the ACL each period are based on loan mix and growth, changes in the levels of nonperforming
loans, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model, and as
occurred in 2023, adjustments for acquired loan portfolios. Much of the change to the level of ACL during the year
ended December 31, 2023 is attributed to the acquisition of GrandSouth. In addition to the initial allowance recorded
for PCD loans of $5.6 million, the Company recorded an initial provision of $12.2 million related to the non-PCD
loans in the GrandSouth portfolio. The balance of the change was a result of loan growth during the year and
updated prepayment speed estimates in the CECL model, which have slowed with market rate increases, thus
requiring additional allowance for the estimated longer life of loans.
The following tables presents the activity in the ACL on loans for each of the periods indicated.
($ in thousands)
As of and for the year ended December 31, 2023
Beginning
balance
Initial ACL
for acquired
PCD loans
Charge-offs
Recoveries
Provisions/
(Reversals)
Ending
balance
Commercial and industrial
$
17,718
5,197
(8,358)
1,393
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
15,128
14,972
22,780
2,957
11,354
3,158
2,900
49
191
51
—
113
8
1
$
90,967
5,610
(120)
(144)
(235)
—
(4)
(309)
(1,005)
(10,175)
370
465
737
13
377
98
248
5,277
(1,487)
2,734
1,583
855
9,556
384
848
21,227
13,940
18,218
24,916
3,825
21,396
3,339
2,992
3,701
19,750
109,853
($ in thousands)
As of and for the year ended December 31, 2022
Beginning
balance
Charge-offs
Recoveries
Provisions/
(Reversals)
Ending
balance
Commercial and industrial
$
16,249
(2,519)
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
16,519
12,317
16,789
1,236
8,686
4,337
2,656
$
78,789
—
(214)
(849)
—
—
(43)
(840)
(4,465)
756
480
691
1,281
11
17
600
207
4,043
3,232
(1,871)
2,178
5,559
1,710
2,651
(1,736)
877
12,600
17,718
15,128
14,972
22,780
2,957
11,354
3,158
2,900
90,967
90
($ in thousands)
As of and for the year ended December 31, 2021
Beginning
balance
Initial ACL
for acquired
PCD loans
Adjustment for
implementation
of CECL
Charge-offs
Recoveries
Provisions/
(Reversals)
Ending
balance
Commercial and industrial
$
11,316
2,917
3,067
(3,722)
1,744
927
16,249
Construction, development &
other land loans
Commercial real estate - owner
occupied
Commercial real estate - non
owner occupied
Multi-family real estate
Residential 1-4 family real
estate
Home equity loans/lines of
credit
Consumer loans
Unallocated
Credit Quality Indicators
5,355
10,608
11,465
1,530
8,048
2,375
1,478
213
165
307
1,181
1
6,140
(189)
380
(448)
222
2,584
92
10
—
2,580
674
(213)
(245)
(362)
(1,933)
—
(273)
(400)
(667)
—
948
150
371
12
761
578
358
—
4,156
16,519
1,803
12,317
5,325
141
16,789
1,236
(2,656)
8,686
(888)
803
—
4,337
2,656
—
$
52,388
4,895
14,575
(7,602)
4,922
9,611
78,789
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.
91
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:
The tables below present the Company’s recorded investment in loans by credit quality indicators by year of
origination or renewal as of the periods indicated. Acquired loans are presented in the year originated, not in the
year of acquisition.
In the tables that follow, 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 years ended December 31, 2023 and December 31,
2022 totaled $25.9 million and $7.9 million, respectively.
As presented in the tables that follow, as of December 31, 2023, the Company had $44.1 million in loans graded as
Special Mention and $54.2 million in loans graded as Classified, which includes all nonaccrual loans at that date.
As of December 31, 2022, the Company had $39.0 million in loans graded as Special Mention and $48.5 million in
loans graded as Classified, which includes all nonaccrual loans at that date.
92
2023
2022
2021
2020
2019
Prior
Revolving
Total
Term Loans by Year of Origination
($ in thousands)
As of December 31, 2023
Commercial and industrial
Pass
Special Mention
Classified
4
11
5,831
120
86,784
2,253
3,904
19
—
846
1,384
70,871
992,980
—
120
23,198
1,232,213
—
73
11,967
14,842
$
136,735
161,131
111,069
2,832
1,626
2,547
1,152
167
720
75,312
185
1,389
76,886
537
38,495
448
1,647
40,590
821
60,626
302,684
886,052
672
4,487
65,785
1,547
1,135
803
7,986
11,824
304,622
905,862
3,533
8,358
563,998
231,450
90,374
16,662
11,598
5,816
70,852
990,750
Total commercial and industrial
141,193
164,830
111,956
Gross charge-offs, YTD
171
1,036
713
Construction, development & other land loans
Pass
Special Mention
Classified
489
657
273
708
59
—
—
—
2
8
Total construction, development &
other land loans
565,144
232,431
90,433
16,662
11,608
Gross charge-offs, YTD
—
—
—
—
—
Commercial real estate - owner occupied
Pass
Special Mention
Classified
Total commercial real estate - owner
occupied
210,449
323,852
299,135
196,343
338
4,456
2,533
1,505
271
1,721
817
895
92,452
5,755
2,288
215,243
327,890
301,127
198,055
100,495
92,941
23,271
1,259,022
Gross charge-offs, YTD
—
—
49
—
—
92
3
144
Commercial real estate - non owner occupied
Pass
Special Mention
Classified
Total commercial real estate - non
owner occupied
Gross charge-offs, YTD
Multi-family real estate
Pass
Special Mention
Classified
509,596
11,353
871
748,854
722,472
287,235
119,515
199
32
36
14
393
4,214
1,183
634
84,690
5,942
1,484
29,001
2,501,363
342
—
19,448
7,249
521,820
749,085
722,522
291,842
121,332
92,116
29,343
2,528,060
—
—
235
—
—
—
—
235
57,378
137,533
139,879
43,881
12,231
10,323
20,151
421,376
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total multi-family real estate
57,378
137,533
139,879
43,881
12,231
10,323
20,151
421,376
Gross charge-offs, YTD
—
—
—
—
—
—
—
—
Residential 1-4 family real estate
Pass
Special Mention
Classified
363,410
400,483
317,515
186,459
94,567
260,102
3,247
1,625,783
681
1,848
41
50
202
474
64
741
587
472
1,987
6,539
—
—
3,562
10,124
Total residential 1-4 family real estate
365,939
400,574
318,191
187,264
95,626
268,628
3,247
1,639,469
Gross charge-offs, YTD
—
—
—
Home equity loans/lines of credit
Pass
Special Mention
Classified
Total home equity loans/lines of credit
Gross charge-offs, YTD
Consumer loans
Pass
Special Mention
Classified
Total consumer loans
Gross charge-offs, YTD
2,830
163
255
3,248
—
1,136
—
—
1,136
—
1,141
122
146
1,409
—
—
223
—
91
314
—
16,497
12,906
4,999
2,173
—
130
—
7
16,627
12,913
34
79
—
45
5,044
73
—
—
2,173
23
—
499
—
112
611
—
432
—
3
435
—
4
—
4
1,233
319,199
326,261
—
10
18
7,890
303
8,504
1,243
327,107
335,068
—
309
309
429
—
34
463
1
30,757
68,193
—
31
30,788
795
—
250
68,443
1,005
Total loans
$ 1,886,592
2,026,392
1,690,561
817,077
382,928
537,330
809,400
8,150,280
Unamortized net deferred loan fees
Total loans, net of deferred loan fees
(178)
$ 8,150,102
Total gross charge-offs, year to date
$
205
1,115
1,070
560
821
1,764
4,640
10,175
93
2022
2021
2020
2019
2018
Prior
Revolving
Total
Term Loans by Year of Origination
($ in thousands)
As of December 31, 2022
Commercial and industrial
Pass
Special Mention
Classified
$
185,167
107,747
85,110
342
734
166
1,909
648
808
Total commercial and industrial
186,243
109,822
86,566
Construction, development & other land loans
Pass
Special Mention
Classified
550,752
267,096
5,128
656
5
107
42,421
3,679
38
Total construction, development &
other land loans
Commercial real estate - owner occupied
Pass
Special Mention
Classified
Total commercial real estate - owner
occupied
556,536
267,208
46,138
31,872
258,025
305,324
190,464
1,170
3,060
1,070
208
4,042
84
96,495
6,926
1,572
51,274
1,312
1,384
53,970
30,973
—
899
590
—
—
590
—
—
—
—
179
—
—
76,588
120,590
627,066
990
5,762
332
488
3,790
11,085
83,340
121,410
641,941
12,722
19,519
923,483
100
44
13
24
8,925
1,768
12,866
19,556
934,176
141,053
15,499
1,007,039
3,277
6,790
665
367
17,150
12,081
262,255
306,602
194,590
104,993
179
151,120
16,531
1,036,270
Commercial real estate - non owner occupied
Pass
Special Mention
Classified
Total commercial real estate - non
owner occupied
Multi-family real estate
Pass
Special Mention
Classified
718,696
747,653
319,708
141,284
545
420
44
1,057
394
—
1,363
884
719,661
748,754
320,102
143,531
119,922
133,701
59,452
9,669
—
—
—
—
—
—
—
—
Total multi-family real estate
119,922
133,701
59,452
9,669
Residential 1-4 family real estate
Pass
Special Mention
Classified
317,282
274,756
186,102
98,559
1,189
763
127
251
110
221
470
359
Total residential 1-4 family real estate
319,234
275,134
186,433
99,388
Home equity loans/lines of credit
Pass
Special Mention
Classified
869
175
106
Total home equity loans/lines of credit
1,150
1,091
—
156
1,247
349
—
94
443
237
—
87
324
Consumer loans
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
—
—
—
—
—
—
—
—
185
—
—
185
—
—
—
—
3
—
—
3
168,096
21,159
2,116,596
1,180
1,328
—
—
3,526
3,689
170,604
21,159
2,123,811
15,212
12,224
350,180
—
—
—
—
—
—
15,212
12,224
350,180
301,885
1,379
1,180,148
2,416
9,072
—
659
4,312
11,325
313,373
2,038
1,195,785
2,020
309,786
314,352
18
213
1,072
7,453
1,265
8,109
2,251
318,311
323,726
1,250
10,953
60,224
—
25
—
55
—
435
1,275
11,008
60,659
Total loans
$ 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, net of deferred loan fees
(1,403)
$ 6,665,145
Loan Modifications to Borrowers Experiencing Financial Difficulty
Effective January 1, 2023, we adopted ASU 2022-02 which eliminated the accounting guidance for TDRs and
requires disclosures for certain loan modifications when a borrower is experiencing financial difficulty.
Occasionally, the Company modifies loans to borrowers in financial distress as a part of our loss mitigation
activities. Various types of modification may be offered including principal forgiveness, term extension, payment
delays, or interest rate reductions. In some cases, the Company will modify a certain loan by providing multiple
types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower
continues to experience financial difficulty, another concession may be granted. For loans included in the
“combination” columns below, multiple types of modifications have been made on the same loan within the current
reporting period.
94
The followings tables present the amortized cost basis at December 31, 2023 of the loans modified during the
twelve months then ended for borrowers experiencing financial difficulty, by loan category and type of concession
granted.
Payment
Delay
Term
Extension
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
$
$
2,590
—
210
—
—
557
—
3,357
251
354
4,245
206
735
2,436
6
8,233
Combination
- Interest
Rate
Reduction
and Term
Extension
—
8
—
—
—
121
—
129
Percent of
Total Class
of Loans
0.31 %
0.04 %
0.35 %
0.01 %
0.04 %
0.93 %
0.01 %
0.14 %
Total
2,841
362
4,455
206
735
3,114
6
11,719
For the twelve months ended December 31, 2023, there were no modifications for borrowers experiencing financial
difficulty with principal forgiveness concessions.
The following tables describes the financial effect for the twelve months ended December 31, 2023 of the
modifications made for borrowers experiencing financial difficulty:
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Weighted
Average
Interest Rate
Reduction
— %
1.55 %
— %
— %
— %
2.40 %
— %
Weighted Average
Payment Delay (in
months)
4
0
11
0
0
13
0
Weighted
Average Term
Extension (in
months)
31
19
34
13
23
49
24
The Company closely monitors the performance of the loans that are modified for borrowers experiencing financial
difficulty to understand the effectiveness of its modification efforts. The following table presents the performance of
loans that have been modified in the last twelve months as of December 31, 2023:
Payment Status (Amortized Cost Basis)
Current
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days Past
Due
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
$
$
2,841
362
4,455
206
656
3,114
6
11,640
—
—
—
—
79
—
—
79
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
None of the modifications made for borrowers experiencing financial difficulty during the twelve months ended
December 31, 2023 are considered to have had a payment default.
Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed
uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is
reduced by the uncollectible amount and the ACL is adjusted by the same amount.
95
TDR Disclosures Prior to the Adoption of ASU 2022-02
The restructuring of a loan was considered a TDR if both (i) the borrower was experiencing financial difficulties and
(ii) the creditor had granted a concession. Concessions may have included 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 and 2021 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 tables present information related to loans modified in a TDR during periods as indicated.
($ in thousands, except number of contracts)
TDRs – Accruing
Commercial and industrial
Construction, development & other land loans
Residential 1-4 family real estate
TDRs – Nonaccrual
Commercial and industrial
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Total TDRs arising during period
($ in thousands, except number of contracts)
TDRs – Accruing
Residential 1-4 family real estate
TDRs – Nonaccrual
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Residential 1-4 family real estate
Total TDRs arising during period
For the year ended December 31, 2022
Post-
Pre-
Modification
Modification
Restructured
Restructured
Balances
Balances
Number of
Contracts
2 $
1
2
5
1
1
12 $
143
67
75
744
72
36
1,137
143
67
78
744
72
36
1,140
For the year ended December 31, 2021
Number of
Contracts
Pre-
Modification
Restructured
Balances
Post-
Modification
Restructured
Balances
1 $
33
33
5
1
3
1
1
12 $
1,438
75
553
1,176
263
3,538
1,435
75
553
1,176
263
3,535
The Company considered a TDR loan to have defaulted when it became 90 or more days delinquent under the
modified terms, had been transferred to nonaccrual status, or had been transferred to foreclosed real estate. There
were no accruing TDRs that were modified in the twelve months preceding December 31, 2022 and 2021 and that
defaulted during the twelve months ended December 31, 2022 and 2021.
96
Concentration of Credit Risk
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. Approximately 88% of the Company's loan
portfolio is secured by real estate and is therefore susceptible to changes in real estate valuations.
Most of our business activity is with customers located within the markets where we have banking operations.
While our exposure to credit risk is affected by changes in the economy within our markets, the risk is not
significantly concentrated. The following table presents the total lending exposure for the counties with the largest
percentage of our loan portfolio as of December 31, 2023 and 2022. No other market (as defined by county) had
total loans outstanding in excess of 5% of the total portfolio at year end.
Wake County, North Carolina
New Hanover County, North Carolina
Mecklenburg County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
Percentage of Loans
Outstanding
2023
2022
10.1 %
8.1 %
7.6 %
5.3 %
5.0 %
11.6 %
9.1 %
7.9 %
6.1 %
5.0 %
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 The Company has determined that there is no concentration of credit risk
associated with its lending policies or practices.
Allowance for 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. 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 ACL on loans, and are discussed in
Note 1. The allowance for unfunded loan commitments of $11.4 million and $13.3 million at December 31, 2023
and December 31, 2022, respectively, were included in "Other liabilities" on the consolidated balance sheets.
The following table presents the balance and activity in the allowance for unfunded loan commitments for twelve
months ended December 31, 2023 and December 31, 2022:
($ in thousands)
Beginning balance
Initial provision for credit losses on unfunded commitments acquired from GrandSouth
Charge-offs
Recoveries
Reversal of provision for unfunded commitments
Ending balance
December 31,
2023
December 31,
2022
$
$
13,306 $
1,921
—
—
(3,858)
11,369 $
13,506
—
—
—
(200)
13,306
Allowance for Credit Losses - Securities Held Maturity
The ACL for securities held to maturity was insignificant at December 31, 2023 and December 31, 2022.
97
Note 5. Premises and Equipment
Premises and equipment at December 31, 2023 and 2022 consisted of the following:
($ in thousands)
Land
Buildings
Furniture and equipment
Vehicles
Leasehold improvements
Total cost
Less accumulated depreciation and amortization
Total premises and equipment
Estimated Useful Lives
2023
2022
15 to 40 years
5 to 10 years
3 years
5 to 39 years
$
$
52,443
127,985
35,214
2,384
1,644
219,670
(68,713)
150,957
45,363
114,884
31,920
1,227
1,644
195,038
(60,851)
134,187
Depreciation expense amounted to $7.8 million, $6.9 million, and $6.2 million for the years ended December 31,
2023, 2022, and 2021, 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 and the carrying amount of unamortizable intangible assets as of the periods presented.
December 31, 2023
December 31, 2022
Gross
Carrying
Amount
Accumulated
Amortization
Net Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Amount
$
2,700
57,890
100
60,690
13,966
2,167
28,932
83
31,182
10,616
533
28,958
17
29,508
3,350
2,700
29,050
100
31,850
13,264
1,847
21,274
58
23,179
9,260
853
7,776
42
8,671
4,004
$
74,656
41,798
32,858
45,114
32,439
12,675
($ in thousands)
Amortizable intangible
assets:
Customer lists
Core deposit intangibles
Other
Intangibles before
servicing assets
SBA servicing assets
Total amortizable
intangible assets
Unamortizable intangible
assets:
Goodwill
$
478,750
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.
In connection with the GrandSouth acquisition on January 1, 2023, the Company recorded $28.8 million in core
deposit intangibles.
Amortization expense of all other intangible assets, excluding the SBA servicing asset, totaled $8.0 million, $3.7
million, and $3.5 million for the years ended December 31, 2023, 2022 and 2021, respectively.
The portfolio of SBA loans serviced for others, which were not included in the accompanying consolidated balances
sheets, was $349.3 million and $392.4 million, respectively, at December 31, 2023 and 2022. There were no other
loans serviced for others in any year presented. During 2023, 2022 and 2021, the Company recorded $3.5 million,
$3.4 million, and $3.9 million , respectively in SBA guaranteed servicing fee income. There was no impairment of
SBA servicing assets at December 31, 2023 and $352 thousand as of December 31, 2022. Impairment charges or
reversals are nominal in each year and are included with amortization expense in noninterest income as an offset to
SBA servicing income.
98
A summary of the key assumptions used in the discounted cash flow method utilized to estimate the fair value of the
SBA servicing asset were as follows:
Prepayment rate assumption:
Weighted average
Range
Discount rate:
Weighted average
Range
Servicing cost
December 31, 2023 December 31, 2022
19.05%
9.27% - 33.14%
15.58%
7.29% - 32.38%
16.36%
11.19% - 22.51%
0.40%
22.14%
14.44% - 31.29%
0.40%
The following table presents the changes in the SBA servicing assets for each period indicated.
($ in thousands)
Beginning balance, net
Add: New servicing assets
Less: Amortization expense and impairment charges
Ending balance, net
December 31,
2023
December 31,
2022
$
$
4,004
702
(1,356)
3,350
5,472
1,332
(2,800)
4,004
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 2023 or 2022, 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, which occurred in the fourth quarter of
2023, indicated that there was no goodwill impairment.
The following table presents the changes in carrying amounts of goodwill:
($ in thousands)
Balance at December 31, 2021
Net activity during 2022
Balance at December 31, 2022
Additions from acquisition of GrandSouth
Balance at December 31, 2023
Total Goodwill
364,263
$
—
364,263
114,487
478,750
$
The following table presents the estimated amortization expense schedule related to acquisition-related amortizable
intangible assets, excluding the SBA servicing assets. 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 amortized intangible assets.
($ in thousands)
2024
2025
2026
2027
2028
Thereafter
Total
99
Estimated
Amortization
Expense
$
$
6,604
5,672
4,704
3,951
3,197
5,380
29,508
Note 7. Income Taxes
The components of income tax expense (benefit) for the years ended December 31, 2023, 2022, and 2021 are as
follows:
($ in thousands)
Current
Deferred
Total
- Federal
- State
- Federal
- State
2023
2022
2021
$
$
24,750
3,857
(481)
(301)
27,825
35,616
4,477
(1,658)
(152)
38,283
25,742
3,733
(4,247)
(553)
24,675
The following is a reconciliation of federal income tax expense at the statutory rate of 21% at December 31, 2023,
December 31, 2022, and December 31, 2021, 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
Nondeductible compensation
Other, net
Total
2023
2022
2021
$
27,711
38,896
25,266
(2,175)
(630)
(920)
241
2,809
489
(13)
274
39
27,825
$
(1,976)
(669)
(1,511)
26
3,369
107
(20)
97
(36)
38,283
(1,589)
(1,229)
(589)
14
2,472
242
(10)
27
71
24,675
100
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, 2023 and
2022:
($ 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
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
2023
2022
$
$
25,431
2,632
403
1,453
188
3,462
23
92,767
—
46
4,691
1,524
773
178
31
133,602
(17)
133,585
(2,952)
(7,070)
(15,523)
—
(388)
—
(25,933)
107,652
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
The valuation allowances for 2023 and 2022 related to state net operating loss carryforwards. The realization of the
remaining net deferred tax assets is determined to be 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 2020. There are no indications of any material adjustments relating to any examination currently being
conducted by any taxing authority.
Retained earnings at December 31, 2023 and 2022 included approximately $6.9 million representing pre-1988 tax
bad debt reserve base year amounts for which no deferred income tax liability has been provided since these
reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a
portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure
to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other
distributions in dissolution, liquidation or redemption of the Bank’s stock.
101
Note 8. Deposits
The following table lists the composition of the deposit portfolio as of the end of the respective years.
($ in thousands)
Noninterest-bearing checking accounts
Interest-bearing checking accounts
Money market accounts
Savings accounts
Other time deposits
Time deposits >$250,000
Total customer deposits
Brokered Deposits - time deposits
Total deposits
At December 31, 2023, the scheduled maturities of time deposits were as follows:
($ in thousands)
2024
2025
2026
2027
2028
Thereafter
$
December 31,
2023
3,379,876
1,411,142
3,653,506
608,380
610,887
355,209
10,019,000
12,599
December 31,
2022
3,566,003
1,514,166
2,416,146
728,641
464,343
276,319
8,965,618
261,911
$ 10,031,599
9,227,529
$
$
901,211
41,579
21,160
9,175
4,727
843
978,695
Deposits received from executive officers and directors and their associates totaled approximately $4.6 million and
$2.0 million at December 31, 2023 and 2022, respectively.
Deposit overdrafts of approximately $1.1 million and $0.8 million at December 31, 2023 and 2022 are included
within "Loans" on the consolidated balance sheets.
As of December 31, 2023 and 2022, the Company held $355.2 million and $276.3 million, respectively, in time
deposits of more than $250,000 (which was the FDIC insurance limit for insured deposits as of December 31,
2023). Brokered deposits were $12.6 million and $261.9 million at December 31, 2023 and 2022, respectively. Total
reciprocal deposits through the Certificate of Deposit Account Registry Services ("CDARS") and Insured Cash
Sweep ("ICS") were $26.6 million and $10.3 million at December 31, 2023 and 2022, respectively.
As of December 31, 2023, the estimated insured deposits totaled $6.3 billion or 63.3% of total deposits, while
approximately $3.7 billion of the Company's total deposits were uninsured deposits. In addition to insured deposits,
there were deposits with a balance totaling $820.9 million at December 31, 2023 which were collateralized by
investment securities such that approximately 71.5% of our total deposits were insured or collateralized at that date.
The Company’s deposit portfolio is not concentrated in deposits to any single customer or to a relatively small
number of customers. Additionally, management is not aware of any concentrations of deposits to classes of
customers or industries that would be similarly affected by economic conditions. The following table presents the
counties with the largest share of our deposit base as of December 31, 2023 and 2022. No other market area (as
defined by county) comprises more than 5% of our deposit base at the dates presented.
Moore County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
Percentage of Total Deposits
2023
2022
10.8 %
7.2 %
5.0 %
10.9 %
8.3 %
6.0 %
102
Note 9. Borrowings and Borrowings Availability
The following tables presents information regarding the Company’s outstanding borrowings at December 31, 2023
(dollars are in thousands):
Description
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Fixed Rate Credit
FHLB Fixed Rate Credit
FHLB Fixed Rate Credit
FRB Bank Term Funding Program
FRB Bank Term Funding Program
Trust Preferred Securities
Due Date
6/26/2028
7/17/2028
8/18/2028
8/22/2028
12/20/2028
1/16/2024
2/27/2024
3/20/2024
12/20/2024
12/27/2024
1/23/2034
Trust Preferred Securities
1/23/2034
Trust Preferred Securities
9/20/2034
Trust Preferred Securities
1/7/2035
Trust Preferred Securities
6/15/2036
Call Feature
None
None
None
None
None
None
None
None
None
None
Quarterly by Company
beginning 1/23/2009
Quarterly by Company
beginning 1/23/2009
Quarterly by Company
beginning 9/20/2009
Quarterly by Company
beginning 1/7/2010
Quarterly by Company
beginning 6/15/2011
Trust Preferred Securities
6/23/2036
Quarterly by Company
beginning 6/23/2011
Subordinated Debentures
11/30/2028
Continuous by Company
beginning 11/30/2023
Subordinated Debentures
11/15/2030
Continuous by Company
beginning 11/15/2025
Balance at
December 31,
2023
$
203
31
151
151
315
80,000
100,000
100,000
224,000
25,000
10,310
10,310
12,372
10,310
25,774
8,248
10,000
18,000
Interest Rate
0.25% fixed
0.00% fixed
1.00% fixed
1.00% fixed
0.50% fixed
5.59% fixed
5.61% fixed
5.61% fixed
4.85% fixed
4.83% fixed
8.30% at 12/31/23
adjustable rate
3 month CME Term
SOFR + 2.91%
8.40% at 12/31/23
adjustable rate
3 month CME Term
SOFR + 3.01%
7.78% at 12/31/23
adjustable rate
3 month CME Term
SOFR + 2.41%
7.66% at 12/31/23
adjustable rate
3 month CME Term
SOFR +2.00%
7.04% at 12/31/23
adjustable rate
3 month CME Term
SOFR + 1.65%
7.47% at 12/31/23
adjustable rate
3 month CME Term
SOFR + 2.11%
9.09% at 12/31/23
adjustable rate
3 month CME Term
SOFR + 3.69%
4.38% fixed
Total borrowings / weighted average rate as of December 31, 2023
Unamortized discount on acquired borrowings
Total borrowings
635,175
(5,017)
630,158
$
5.57%
103
The following table presents information regarding the Company’s outstanding borrowings at December 31, 2022
(dollars are in thousands):
Description
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Principal Reducing Credit
FHLB Fixed Rate Credit
FHLB Fixed Rate Credit
FHLB Fixed Rate Credit
FHLB Daily Rate Credit
Trust Preferred Securities
Due date
7/24/2023
12/22/2023
6/26/2028
7/17/2028
8/18/2028
8/22/2028
12/20/2028
1/9/2023
2/1/2023
2/9/2023
8/23/2023
1/23/2034
Trust Preferred Securities
1/23/2034
Trust Preferred Securities
9/20/2034
Trust Preferred Securities
1/7/2035
Trust Preferred Securities
6/15/2036
Call Feature
None
None
None
None
None
None
None
None
None
None
None
Quarterly by Company
beginning 1/23/2009
Quarterly by Company
beginning 1/23/2009
Quarterly by Company
beginning 9/20/2009
Quarterly by Company
beginning 1/7/2010
Quarterly by Company
beginning 6/15/2011
Balance at
December 31,
2022
$
32
912
214
38
158
159
329
50,000
80,000
50,000
40,000
10,310
10,310
12,372
10,310
25,774
Total borrowings / weighted average rate as of December 31, 2022
Unamortized discount on acquired borrowings
Total borrowings
290,918
(3,411)
287,507
$
Interest Rate
1.00% fixed
1.25% fixed
0.25% fixed
0.00% fixed
1.00% fixed
1.00% fixed
0.50% fixed
4.15% fixed
4.25% fixed
4.35% fixed
4.57% fixed
7.06% at 12/31/22
adjustable rate
3 month LIBOR +2.65%
7.16% at 12/31/22
adjustable rate
3 month LIBOR +2.75%
6.90% at 12/31/22
adjustable rate
3 month LIBOR + 2.15%
6.08% at 12/31/22
adjustable rate
3 month LIBOR + 2.00%
6.16% at 12/31/22
adjustable rate
3 month LIBOR + 1.39%
4.82%
All outstanding FHLB and FRB borrowings may be accelerated immediately by the FHLB and FRB, respectively, 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 borrowing agreement.
In the above tables, at December 31, 2023, short-term borrowings (original maturity terms of less than twelve
months) totaled $529.0 million and had a weighted average interest rate of 5.25%. At December 31, 2022, short-
term borrowings totaled $220.9 million and had a weighted average interest rate of 4.30% .
Trust Preferred Securities in the above tables are borrowings structured as trust preferred capital securities which
were issued by various unconsolidated subsidiaries of the Company as discussed in Note 1. These unsecured debt
securities qualify as Tier I capital for capital adequacy requirements.
The Subordinated Debentures in the tables above are borrowings issued by GrandSouth and acquired by the
Company on January 1, 2023. These unsecured debt securities qualify as Tier II capital for capital adequacy
requirements.
At December 31, 2023, the Company had several sources of readily available borrowing capacity:
•
A $1.3 billion 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. As of December 31, 2023, the line of
credit is secured by a blanket lien on portions of the Company's real estate loan portfolio totaling
approximately $2.3 billion and the Company's FHLB stock totaling $21.7 million. $280.9 million was
outstanding on the line of credit at December 31, 2023 and $221.8 million was outstanding at December 31,
2022;
104
•
•
•
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, 2023 or
2022;
A $294.1 million line of credit through the Federal Reserve's Bank Term Funding Program, secured by
specific investment securities, with $249.0 million outstanding at December 31, 2023; and
An approximately $561.6 million line of credit through the Federal Reserve's discount window borrowing
program, which was secured at December 31, 2023 by a blanket lien on a portion of the Company’s
commercial and consumer loan portfolios (excluding real estate collateral) totaling approximately$330.9
million and specific investment securities with a carrying value of $710.2 million. None was outstanding at
December 31, 2023 or 2022, respectively.
At December 31, 2023, the contractual maturities of borrowings were as follows for the years ending:
($ in thousands)
FHLB Principal
Reducing
Credit
FHLB Fixed
Rate Credit
FRB Bank
Term Funding
Program
Trust
Preferred
Securities
Subordinated
Debentures
2024
2025
2026
2027
2028
Thereafter
Total
$
$
—
—
—
—
851
—
851
280,000
249,000
—
—
—
—
—
—
—
—
—
—
280,000
249,000
—
—
—
—
—
77,324
77,324
—
—
—
—
10,000
18,000
28,000
Unamortized discount on acquired borrowings
Total borrowings
Note 10. Leases
Total
529,000
—
—
—
10,851
95,324
635,175
(5,017)
630,158
The Company enters into leases in the normal course of business. As of December 31, 2023, the Company leased
17 branch offices for which the land and buildings are leased and ten 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 and the lease agreements have maturity dates ranging from January 2024
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 19.8 years as of December 31, 2023 and 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, based on for a fully collateralized loan with a maturity similar to
the lease term, 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 3.19% and 2.97% as of December 31,
2023 and 2022, respectively.
105
The right-of-use assets and lease liabilities were $17.1 million and $17.8 million as of December 31, 2023,
respectively, and were $18.7 million and $19.4 million as of December 31, 2022, respectively.
Total operating lease expense charged to operations under all operating lease agreements was $3.1 million in 2023,
$2.9 million in 2022, and $2.6 million in 2021. These expenses are recorded within noninterest expense in the
"Equipment related expenses" line on the consolidated statements of income.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31,
2023 for each of the five calendar years ending December 31, 2028 are as follows:
($ in thousands)
2024
2025
2026
2027
2028
Thereafter
Total undiscounted lease payments
Less effect of discounting
Present value of estimated lease payments (lease liability)
Note 11. Employee Benefit Plans
401(k) Plan
$
$
2,446
1,914
1,633
1,359
1,267
17,222
25,841
(8,008)
17,833
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. For each of the years ended December 31, 2023, 2022, and
2021, the Company matched 100% of the employee’s contribution up to 6%. The Company’s matching contribution
expense was $6.1 million, $4.9 million, and $4.3 million for the years ended December 31, 2023, 2022, and 2021,
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 and has
not made any contributions to the Pension Plan in any year presented.
In March 2023, the Company’s Board of Directors (the "Board") approved a resolution to terminate the Pension
Plan. During the second quarter of 2023, the Company commenced the Pension Plan termination process and on
July 31, 2023, the Pension Plan was amended to terminate it as of that date. During the fourth quarter of 2023, the
Pension Plan settled benefits through lump-sum payments of approximately $9.2 million to eligible participants
electing that option and purchased annuity contracts from One America (the "Insurer") which irrevocably transferred
to the Insurer approximately $19.5 million of the Pension Plan's obligations and related assets, thereby reducing the
Pension Plan's obligations at December 31, 2023 to zero. The Insurer will administer all future payments to
remaining participants of the Pension Plan. The Pension Plan's net funded position was sufficient to cover the lump
sum payments and the purchase of the annuity contract, settling all benefit obligations with no additional funding
required. As a result of this transaction, the Company recognized a one-time, non-cash pension settlement charge
of $1.0 million. After the settlement of the benefit obligations and payment of expenses, the Company had excess
assets in the Pension Plan of approximately $2.5 million. The Company has elected to utilize the remaining surplus
106
after payment of final administrative expenses for future contributions under the Company’s 401(k) plan. The assets
will be held in the Pension Plan trust account until the contributions are made and are included in "Other assets" on
the consolidated balance sheets.
Prior to the termination of the Pension Plan, the investment objective was to ensure that there were sufficient assets
to fund regular pension benefits payable to employees over the long-term life of the plan. Plan assets were
allocated in a manner to closely duration-match the actuarial projected cash flows of the plan liabilities. In 2018, the
Pension Plan adopted a liability-driven investment strategy to help meet the objectives. This strategy employed a
structured fixed-income portfolio designed to reduce volatility in the Pension Plan’s future funding requirements and
funding status. This was accomplished by using a blend of high quality corporate and government fixed-income
securities, with both intermediate and long-term durations.
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as
computed by the Company with assistance from its independent actuarial consultants, and its plan assets, with the
difference between the two amounts representing the funded status of the Pension Plan as of the end of the
respective year.
($ in thousands)
Change in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid, including lump sums
Transfer to insurer
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, including lump sums
Transfer to insurer
Plan assets at end of year
2023
2022
2021
$
30,611
—
1,451
(1,470)
(11,135)
(19,457)
—
33,655
(547)
—
(11,135)
(19,457)
2,517
41,657
—
1,043
(10,286)
(1,803)
—
30,611
44,904
(9,446)
—
(1,803)
—
33,655
44,750
—
981
(2,041)
(2,033)
—
41,657
48,167
(1,230)
—
(2,033)
—
44,904
Funded status at end of year (1)
$
2,517
3,044
3,247
(1) - As of December 31, 2023, the Pension Plan was terminated and surplus assets were held in the Pension Plan's trust account until deployed as contributions
to the Company's 401(k) Plan in 2024 and 2025.
The following table presents information regarding the amounts recognized in accumulated other comprehensive
income (loss) (“AOCI”) at December 31, 2023 and 2022, as it relates to the Pension Plan.
($ in thousands)
Net actuarial loss
Prior service cost
Amount recognized in AOCI before tax effect
Tax benefit
Net amount recognized as decrease to AOCI
2023
2022
$
$
—
—
—
—
—
(1,497)
—
(1,497)
344
(1,153)
107
The following table reconciles the beginning and ending balances of AOCI at December 31, 2023 and 2022, as it
relates to the Pension Plan:
($ in thousands)
Accumulated other comprehensive loss at beginning of fiscal year
Net loss arising during period
Recognition of net actuarial loss due to plan settlement
Amortization of net unrecognized actuarial loss
Tax (benefit) expense of changes during the year, net
Accumulated other comprehensive loss at end of fiscal year
2023
2022
$
$
(1,153)
(693)
998
1,192
(344)
—
(1,110)
(312)
—
256
13
(1,153)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension
Plan for the periods presented. As noted above, there are no remaining obligations of the Pension Plan and assets
at December 31, 2023 represent the surplus cash held in the Pension Plan's trust account for contributions to be
made to the Company's 401(k) plan during 2024 and 2025.
($ 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
2023
2022
$
$
4,542
(2,025)
—
2,517
4,689
(147)
—
4,542
Net pension cost for the Pension Plan included the following components for the years ended December 31, 2023,
2022, and 2021:
($ in thousands)
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization and deferral
Recognized settlement loss
Net periodic pension cost
2023
2022
2021
$
$
—
1,451
(1,616)
1,192
998
2,025
—
1,043
(1,152)
256
—
147
—
981
(1,059)
577
—
499
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 for the years
ended December 31, 2023, 2022, and 2021:
Discount rate used to determine net periodic pension cost
Expected long-term rate of return on assets
Discount rate used to calculate end of year liability disclosures (1)
(1) - As of December 31, 2023, there were no Pension Plan obligations or liabilities.
2023
4.94%
4.94%
n/a
2022
2.62%
2.62%
4.94%
2021
2.24%
2.24%
2.62%
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.
As noted above, the remaining assets in the Pension Plan's trust account at December 31, 2023 represent the
surplus cash held for contributions to be made to the Company's 401(k) plan during 2024 and 2025. The cash
balance is held in an interest-bearing money market accounts and is considered a Level 1 fair value asset.
The Pension Plan assets at December 31, 2022 included $194.0 thousand of cash and cash equivalents which
consisted of interest-bearing money market accounts and is considered a Level 1 fair value asset. The Pension
Plans' Level 2 assets totaled $33.5 million and consisted of fixed income commingled funds that primarily include
investments in U.S. government securities and corporate bonds. The commingled funds are valued at the net asset
value ("NAV") for the units in the fund. The NAV, as provided by the Trustee, is used as practical expedient to
estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund.
108
Supplemental Executive Retirement Plan
Historically, the Company sponsored a Supplemental Executive Retirement Plan (the “SERP”) for the benefit of
certain senior management executives of the Company. The purpose of the SERP was to provide additional
monthly pension benefits to ensure that each such senior management executive would receive lifetime monthly
pension benefits equal to 3% of his or her final average compensation multiplied by his or her years of service
(maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60% of his or her final average
compensation. The amount of a participant’s monthly SERP benefit is reduced by (i) the amount payable under the
Company’s Pension Plan (described above), and (ii) 50% of the participant’s primary social security benefit. Final
average compensation means the average of the five highest consecutive calendar years of earnings during the last
ten years of service prior to termination of employment. The SERP is an unfunded plan. Payments are made from
the general assets of the Company. Effective December 31, 2012, the Company froze the SERP to all participants.
The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed by
the Company’s independent actuarial consultants:
($ in thousands)
Change in benefit obligation
2023
2022
2021
Benefit obligation at beginning of year
$
3,521
Service cost
Interest cost
Actuarial gain
Benefits paid
Accumulated benefit obligation at end of year
Plan assets
Funded status at end of year
—
158
(86)
(241)
3,352
—
4,660
—
112
(1,006)
(245)
3,521
—
5,982
—
119
(1,119)
(322)
4,660
—
$
(3,352)
(3,521)
(4,660)
The accumulated benefit obligation presented above is included in "Other liabilities" in the consolidated balance
sheets at December 31, 2023 and 2022.
The following table presents information regarding the amounts recognized in AOCI at December 31, 2023 and
2022, as it relates to the SERP:
($ in thousands)
Net (loss) gain
Prior service cost
Amount recognized in AOCI before tax effect
Tax benefit (expense)
Net amount recognized as (decrease) increase to AOCI
2023
2022
$
$
(100)
—
(100)
23
(77)
1,551
—
1,551
(356)
1,195
The following table reconciles the beginning and ending balances of AOCI at December 31, 2023 and 2022, as it
relates to the SERP:
($ in thousands)
Accumulated other comprehensive income at beginning of fiscal year
Net gain arising during period
Prior service cost
Amortization of unrecognized actuarial loss
Tax benefit (expense) related to changes during the year, net
Accumulated other comprehensive (loss) income at end of fiscal year
2023
2022
$
$
1,195
86
—
(1,737)
379
(77)
838
1,007
—
(544)
(106)
1,195
109
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
2023
2022
$
$
(5,071)
1,579
241
(3,251)
(5,748)
432
245
(5,071)
Net pension cost for the SERP included the following components for the years ended December 31, 2023, 2022,
and 2021:
($ in thousands)
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Amortization of net actuarial (loss) gain
Net periodic pension cost
2023
2022
2021
$
$
—
158
(1,737)
(1,579)
—
112
(544)
(432)
—
119
15
134
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 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)
2024
2025
2026
2027
2028
2029-2033
$
Estimated
benefit
payments
240
278
280
298
288
1,322
The following assumptions were used in determining the actuarial information for the SERP for the years ended
December 31, 2023, 2022, and 2021:
Discount rate used to determine net periodic pension cost
Discount rate used to calculate end of year liability disclosures
2023
2022
2021
4.90%
4.68%
2.48%
4.90%
2.04%
2.48%
The Company’s 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, including credit cards, at December 31,
2023 and December 31, 2022.
($ in thousands)
Loan commitments
Unused lines of credit
Total
December 31, 2023
Variable
Rate
179,934
1,417,250
1,597,184
Fixed Rate
$ 442,916
407,521
$ 850,437
Total
622,850
1,824,771
2,447,621
Fixed Rate
681,486
273,244
954,730
December 31, 2022
Variable
Rate
211,071
1,194,575
1,405,646
Total
892,557
1,467,819
2,360,376
In addition to loan commitments, at December 31, 2023 and 2022, the Company had $20.6 million and $20.2
million, respectively, in standby letters of credit outstanding. The Company has no carrying amount for these
standby letters of credit at either of those dates. The nature of the standby letters of credit is a stand-alone
110
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 allowance for unfunded loan commitments which is included in "Other liabilities" in the
consolidated balance sheets. The allowance 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, 2023, the Company had a remaining funding
commitments of $26.3 million related to these investments.
The Company, in the normal course of business, may be subject to various pending and threatened lawsuits in
which claims for monetary damages are asserted. The Company is not involved in any legal proceedings which, in
management’s opinion, could have a material effect on the consolidated financial position of the Company.
Note 13. Derivatives and Hedging Activities
In the normal course of business, the Company is exposed to certain risk arising from both its business operations
and economic conditions. As an element of its risk management strategies, the Company may enter into derivative
financial instruments to manage exposures that arise from business activities that result in the receipt or payment of
future known and uncertain cash amounts, the value of which are determined by interest rates. To accommodate
customers, the Company may enter into interest rate swaps with certain commercial loan customers, with offsetting
positions to dealers under a back-to-back swap program.
At December 31, 2023, the Company's derivative financial instruments consist entirely of customer back-to-back
interest rate swaps which are not designated as hedges. Under this program, the Company executes interest rate
swaps with commercial banking customers to facilitate their risk management strategies. Those interest rate swaps
are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the
Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives
associated with this program are not designated as hedging instruments, changes in the fair value of both the
customer derivatives and the offsetting derivatives are recognized directly in earnings.
The Company's derivative instruments are carried at fair value and included in "Other assets" for derivatives with
positive fair values and "Other liabilities" for derivatives with negative fair values on the consolidated balance
sheets.
The table below presents the fair value of Company’s derivative financial instruments as of the date indicated.
($ in thousands)
Derivatives not designated as hedging instruments:
Customer interest rate contracts
Offsetting counterparty interest rate contracts
Total derivatives not designated as hedging instruments
As of December 31, 2023
Fair Value
Notional
Amount
Derivative
Assets
Derivative
Liabilities
$
13,000
13,000
$
$
295
—
295
—
349
349
The table below presents the gains and losses recognized in income related to derivative financial instruments that
are not designated as hedging instruments. Gains and losses on interest rate swap undesignated hedges are
included in "Other gains, net" on the consolidated statements of income for the date indicated.
($ in thousands)
Customer interest rate swaps and counterparty offsets
Total
Gains (Losses)
Year Ended December
31, 2023
$
$
(54)
(54)
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s
derivatives as of December 31, 2023. The Company’s interest rate swaps are subject to master netting
arrangements between the Company and its counterparties, however, the Company has not made a policy election
111
to offset its derivative positions. The interest rate swaps with borrowers are cross collateralized with the underlying
loan and, therefore, there is no posted collateral. Interest rate swap agreements with third-party counterparties
contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold
amount and receive collateral for agreements in a net asset position.
As of December 31, 2023
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
Net Amounts
of Assets
presented in
the
Consolidated
Balance
Sheets
Gross
Amounts of
Recognized
Assets
Gross Amounts Not Offset in the Consolidated
Balance Sheets
Financial
Instruments
Cash
Collateral
Received
Net Amount
Interest rate swaps
$
295
—
295
—
—
295
Gross
Amounts
Offset in the
Consolidated
Balance
Sheets
Net Amounts
of Liabilities
presented in
the
Consolidated
Balance
Sheets
Gross
Amounts of
Recognized
Liabilities
Gross Amounts Not Offset in the Consolidated
Balance Sheets
Financial
Instruments
Cash
Collateral
Posted
Net Amount
Interest rate swaps
$
349
—
349
—
330
19
The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding
derivative instruments which were immaterial at December 31, 2023 and 2022.
Credit-risk-related Contingent Features
The Company's agreements with its derivative counterparties contain a provision where if either party defaults on
any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with
derivative counterparties also include provisions that if not met, could result in the Company being declared in
default on its derivative obligations, including if repayment of the underlying indebtedness is accelerated by the
lender due to the Company's default on the indebtedness. The Company has provisions in its derivative
counterparty agreement providing that if the Company fails to maintain its status as a well-capitalized institution or is
subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and the
Company would be required to settle its obligations under the agreements.
The Company manages its credit exposure on derivative transactions by entering into a bilateral credit support
agreement with each non-customer counterparty. The credit support agreement requires collateralization of
exposure beyond specified minimum threshold amounts. As of December 31, 2023, the fair value of derivatives in a
net liability position, including accrued interest, was $349 thousand. As of December 31, 2023, the Company has
minimum collateral posting thresholds with its derivative counterparty and has posted collateral of $330 thousand.
Note 14. Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal and most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions
that market participants would use in pricing an asset or liability.
112
The following table summarizes the Company’s financial instruments that were measured at fair value on a
recurring and nonrecurring basis at December 31, 2023.
Description of Financial Instruments ($ in thousands)
Recurring
Securities available for sale:
US Treasury securities
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
Total available for sale securities
Derivative financial assets
Presold mortgages in process of settlement
Derivative financial liabilities
Nonrecurring
Individually evaluated loans
Fair Value at
December 31,
2023
$
172,570
60,266
1,937,784
18,759
2,189,379
295
2,667
349
1,953
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
—
172,570
60,266
1,937,784
18,759
2,189,379
295
2,667
349
—
—
—
—
—
—
—
—
—
1,953
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.
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
Impaired loans
Foreclosed real estate
Fair Value at
December 31,
2022
$
168,758
57,456
2,045,000
43,279
2,314,493
1,282
9,590
38
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
—
168,758
57,456
2,045,000
43,279
2,314,493
1,282
—
—
—
—
—
—
—
—
9,590
38
The following is a description of the valuation methodologies used for instruments measured at fair value.
Securities Available for Sale — When quoted market prices are available in an active market, the securities
are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values
can be estimated by observing quoted prices of securities with similar characteristics, the securities are
classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities
are determined by the Company's 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 may be classified within Level
3 of the hierarchy.
113
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.
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 which is considered a Level 2 input.
Derivative financial assets and liabilities - The fair values of interest rate swaps are determined using the
market standard methodology of netting the discounted future fixed cash receipts (or payments) and the
discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are
based on an expectation of future interest rates (forward curves) derived from observable market interest
rate curves. These are considered a Level 2 input.
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 ACL. For any real estate valuations
subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate
is treated as a foreclosed real estate write-down on the consolidated statements of income.
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2023, the
significant unobservable inputs used in the fair value measurements were as presented in the tables below.
($ in thousands)
Individually evaluated loans -
collateral-dependent
Fair Value at
December 31,
2023
$
1,953
Valuation
Technique
Appraised
value
Significant Unobservable
Inputs
Discounts applied for estimated
costs to sell
Range
(Weighted
Average)
10%
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 - valued
at PV of expected cash flows
Foreclosed real estate
Fair Value at
December 31,
2022
$
5,680
3,910
38
Valuation
Technique
Appraised
value
PV of
expected cash
flows
Appraised
value
Significant Unobservable
Inputs
Discounts applied for estimated
costs to sell
Discount rates used in the
calculation of PV of expected
cash flows
Discounts applied for estimated
costs to sell
Range
(Weighted
Average)
10%
5.5% - 11.1%
(6.76%)
10%
114
In the above tables, weighted average discounts were calculated on relative fair value for underlying loans based on
the range of discount rates applied. The discount applied for estimated costs to sell collateral on individually
evaluated loans was 10%.
The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31,
2023 and 2022 are as follows:
($ in thousands)
Cash and due from banks,
noninterest-bearing
Due from banks, interest-bearing
Securities held to maturity
Total loans, net of allowance
Accrued interest receivable
Bank-owned life insurance
SBA servicing asset
Demand deposits, money market and
savings
Time deposits
Borrowings
Accrued interest payable
Level in
Fair Value
Hierarchy
Level 1
Level 1
Level 2
Level 3
Level 1
Level 1
Level 3
Level 1
Level 2
Level 2
Level 1
December 31, 2023
December 31, 2022
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
100,891
136,964
533,678
8,040,249
37,351
183,897
3,351
9,052,905
978,694
630,158
5,699
100,891
136,964
449,623
7,379,079
37,351
183,897
4,049
9,052,905
972,513
615,614
5,699
101,133
169,185
541,700
6,574,178
29,710
164,592
4,004
8,224,956
1,002,573
287,507
2,738
101,133
169,185
432,528
6,240,870
29,710
164,592
4,721
8,224,956
993,989
277,146
2,738
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly
liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include
net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense
accounts, income taxes currently payable, and other various accrued expenses. In addition, the income tax
ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Note 15. Stock-Based Compensation
The Company recorded total stock-based compensation expense of $4.6 million, $3.0 million, and $2.3 million for
the years ended December 31, 2023, 2022, and 2021, respectively, include in "Total personnel expense" on the
accompanying consolidated statements of income. The Company recognized $1.1 million, $0.7 million, and $0.5
million of income tax benefits related to stock-based compensation expense in its income statement for the years
ended December 31, 2023, 2022, and 2021, respectively.
At December 31, 2023, 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, 2023, the
Equity Plan had 205,498 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
115
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 will vest. The Company recognizes forfeitures as they
occur.
In addition to employee equity awards, the Company's practice is to grant unrestricted common shares to each non-
employee director (currently 14 in total) in June of each year. These grants were each valued at approximately
$37,500 in 2023 and $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, 2023, the Company granted 17,094
shares of common stock to non-employee directors (1,221 shares per director), at a fair market value of $30.69 per
share, which was the closing price of the Company’s common stock on that date, which resulted in $525,000 in
expense. 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. The expense associated with director grants is
classified as "Other operating expense" in the consolidated statements of income.
The following table presents information regarding the activity during 2021, 2022, and 2023 related to the
Company’s outstanding restricted stock:
Nonvested at January 1, 2021
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
Granted during the period
Vested during the period
Forfeited or expired during the period
Nonvested at December 31, 2023
Shares
Long-Term Restricted Stock
Weighted
Average Grant
Date Fair Value
33.80
40.56
39.82
37.32
172,105 $
104,414
(63,369)
(6,819)
206,331
95,960
(70,110)
(9,169)
223,012
143,380
(74,310)
(791)
291,291
35.25
38.09
36.69
32.62
36.14
37.08
29.43
37.88
38.01
The total fair value of shares vested during 2023, 2022 and 2021 was $2.2 million, $2.6 million and $2.5 million,
respectively. Total unrecognized compensation expense as of December 31, 2023 amounted to $5.0 million with a
weighted average remaining term of 1.8 years. The Company expects to record $3.3 million of compensation
expense in the next twelve months related to these nonvested awards that are outstanding at December 31, 2023.
As discussed in Note 2, in conjunction with the GrandSouth acquisition, GrandSouth common stock options
outstanding at January 1, 2023 became fully vested under the change in control provisions in the GrandSouth
option plans and were converted into replacement options to acquire 0.91 shares of the Company's common stock.
The Company issues new shares of common stock when options are exercised.
116
Stock option activity and related information is presented below as of and for the periods indicated:
Options Outstanding
Balance at January 1, 2023
Replacement options issued in conjunction with
acquisition of GrandSouth
Exercised during the period
Forfeited or expired during the period
Weighted-
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
(thousands)
Number of
Shares
—
542,345
(236,760)
—
Weighted-
Average
Exercise
Price
—
20.14
19.09
—
Outstanding at December 31, 2023
305,585
20.95
5.74
$
4,907
Exercisable at December 31, 2023
305,585
20.95
5.74
$
4,907
Stock options outstanding are summarized as follows as of December 31, 2023:
Shares
77,857
120,500
107,228
305,585
Range
$13.79 - 18.18
$18.19
$18.20 - 31.32
Weighted Average Price
15.69
18.19
27.88
20.95
Weighted Average Remaining
Life in Years
3.51
5.48
7.64
5.74
The fair value of the replacement options issued in conjunction with the GrandSouth acquisition as of January 1,
2023 was measured using the Black-Scholes option pricing model. The following table illustrates the assumptions
for the Black-Scholes model used in determining the fair value of options granted:
Fair value per option, weighted average
Expected life (years)
Expected stock price volatility, weighted average
Expected dividend yield
Risk-free interest rate, weighted average
Expected forfeiture rate
For the twelve
months ended
December 31,
2023
$
24.85
1.4 - 4.7
46.39 %
2.05 %
4.18 %
— %
The expected life is based on historical exercises and forfeitures experience of the grantees. The volatility is based
on historical price volatility. The risk-free interest rate is based on a U.S. Treasury instrument with a life that is
similar to the expected life of the option grant.
At December 31, 2023, the Company had no unrecognized compensation expense related to stock options. All
unexercised options expire ten years after the applicable original grant dates under the GrandSouth stock option
plan.
Note 16. 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 $6.8 million of the deferred compensation has been paid to the plan participants. The
balances of the related asset and liability were $1.4 million and $1.6 million at December 31, 2023 and
December 31, 2022, respectively, both of which are presented as components of shareholders’ equity.
117
Stock Repurchases
Pursuant to authorizations by the Company's Board, the Company from time to time has repurchased shares of
common stock in private transactions and in open-market purchases. The Company did not repurchase any shares
of the Company's common stock during either 2023 or 2022. As of December 31, 2023, there was no share
repurchase program in place.
Note 17. Earnings Per Share
The following is a reconciliation of the income (numerator) and shares (denominator) used in computing Basic and
Diluted EPS:
($ in thousands except
per
share amounts)
Basic EPS:
Net income
Less: income allocated
to participating
securities
Basic EPS per
common share
Diluted EPS:
Net income
Effect of Dilutive
Securities
Diluted EPS per
common share
2023
2022
2021
For Years Ended December 31,
Income
Shares
Per
Share
Amount
Income
Shares
Per
Share
Amount
Income
Shares
Per
Share
Amount
$ 104,131
$ 146,936
$ 95,644
(685)
(779)
(483)
$ 103,446
40,746,772 $ 2.54
$ 146,157
35,485,620 $ 4.12
$ 95,161
29,876,151
$ 3.19
$ 104,131
40,746,772
$ 146,936
35,485,620
$ 95,644
29,876,151
—
418,062
—
189,110
—
151,634
$ 104,131
41,164,834 $ 2.53
$ 146,936
35,674,730 $ 4.12
$ 95,644
30,027,785
$ 3.19
For the year ended December 31, 2023, there were no options that were anti-dilutive. There were no outstanding
options in other year presented.
Note 18. Accumulated Other Comprehensive Income (Loss)
The components of AOCI for the Company are as follows:
($ in thousands)
Unrealized loss on securities available for sale
Deferred tax asset
Net unrealized loss on securities available for sale
Postretirement plans (liability) asset
Deferred tax asset (liability)
Net postretirement plans (liability) asset
$
December 31,
2023
(400,720)
92,767
(307,953)
December 31,
2022
(444,063)
102,046
(342,017)
(100)
23
(77)
54
(12)
42
December 31,
2021
(32,067)
7,369
(24,698)
(353)
81
(272)
Total accumulated other comprehensive loss
$
(308,030)
(341,975)
(24,970)
118
The following table discloses the changes in AOCI for the years ended December 31, 2023, 2022, and 2021 (all
amounts are net of tax).
($ in thousands)
Beginning balance at January 1, 2021
Unrealized
Gain (Loss) on
Securities
Available for
Sale
$
15,749
Postretirement
Plans
(Liability)
Asset
Total
(1,399)
14,350
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive (loss) income
Ending balance at December 31, 2021
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive (loss) income
Ending balance at December 31, 2022
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
Net current-period other comprehensive income (loss)
(41,400)
953
(40,447)
(24,698)
(317,319)
—
(317,319)
(342,017)
34,064
—
34,064
671
456
1,127
(272)
536
(222)
314
(40,729)
1,409
(39,320)
(24,970)
(316,783)
(222)
(317,005)
42
(341,975)
(466)
347
(119)
33,598
347
33,945
Ending balance at December 31, 2023
$
(307,953)
(77)
(308,030)
Amounts reclassified from AOCI for Unrealized Gain (Loss) on Securities AFS represent realized securities gains or
losses, net of tax effects. Amounts reclassified from AOCI for Postretirement Plans Asset (Liability) represent
amortization of amounts included in AOCI, net of taxes, and are recorded in the "Other operating expenses" line
item of the consolidated statements of income.
Note 19. 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, 2023, approximately $1.1 billion of the Company’s investment in the
Bank was restricted as to transfer to the Company without obtaining prior regulatory approval.
There was no average reserve balance requirement under the requirements of the Federal Reserve at
December 31, 2023.
The Company and the Bank must comply with regulatory capital requirements established by the Federal Reserve.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and
Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
119
The Company’s and the Bank’s respective regulatory capital ratios as of December 31, 2023 and 2022, along with
the minimum amounts required for capital adequacy purposes and to be well capitalized under prompt corrective
action in effect at such times are presented below. There are no conditions or events since year-end that
management believes have changed the Company’s or the Bank's classification.
($ in thousands)
Amount
Ratio
Actual
As of December 31, 2023
Common Equity Tier I Capital Ratio
Fully Phased-In Regulatory
Guidelines Minimum
Ratio
Amount
(must equal or exceed)
To Be Well Capitalized
Under Current Prompt
Corrective Action
Provisions
Amount
(must equal or exceed)
Ratio
Company
Bank
Total Capital Ratio
Company
Bank
Tier I Capital Ratio
Company
Bank
Leverage Ratio
Company
Bank
$ 1,187,027
1,291,074
13.20 %
14.36 %
629,376
629,256
7.00 %
7.00 %
N/A
584,309
N/A
6.50 %
1,397,502
1,403,551
15.54 %
15.61 %
944,064
943,884
10.50 %
10.50 %
N/A
898,938
N/A
10.00 %
1,257,834
1,291,074
13.99 %
14.36 %
764,242
764,097
8.50 %
8.50 %
N/A
719,150
1,257,834
1,291,074
10.91 %
11.20 %
461,312
461,248
4.00 %
4.00 %
N/A
576,560
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
$ 1,010,369
1,077,526
13.02 %
13.88 %
543,403
543,301
7.00 %
7.00 %
N/A
504,494
1,171,084
1,174,634
15.09 %
15.13 %
815,104
814,951
10.50 %
10.50 %
N/A
776,144
1,073,958
1,077,526
13.83 %
13.88 %
659,846
659,723
8.50 %
8.50 %
N/A
620,915
1,073,958
1,077,526
10.51 %
10.55 %
408,623
408,569
4.00 %
4.00 %
N/A
510,712
120
N/A
8.00 %
N/A
5.00 %
N/A
6.50 %
N/A
10.00 %
N/A
8.00 %
N/A
5.00 %
Note 20. Revenue from Contracts with Customers
All of the Company’s revenues that are in the scope of ASC Topic 606: Revenue from Contracts with Customers
(“ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources of
noninterest income for years ended December 31, 2023, 2022, and 2021. 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
2023
$
16,800
15,523
12,317
9,319
6,405
—
5,503
1,803
39,830
17,660
57,490
$
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
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. "Bankcard 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 and fees" includes 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 and
due upon billing 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
121
insurance company and the policyholder. The Company’s performance obligation was generally satisfied upon the
issuance of the insurance policy and is due upon billing.
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 and are due upon billing.
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 21. Supplementary Income Statement Information
Components of other noninterest income or noninterest expense exceeding 1% of total revenue for any of the years
ended December 31, 2023, 2022, and 2021 are as follows:
($ in thousands)
Total revenue threshold (1%)
Noninterest income:
2023
2022
2021
$
5,462
4,089
3,295
Other service charges, commissions, and fees – interchange fees, net
$
9,319
14,996
17,323
Noninterest expense:
Other operating expenses – software costs
Other operating expenses – data processing expense
Other operating expenses – credit card rewards expense
Other operating expenses – FDIC insurance expense
Note 22. Condensed Parent Company Information
Condensed financial data for the Company (parent company only) follows:
8,717
8,733
3,841
6,982
6,064
7,535
547
2,913
5,315
5,959
3,431
2,332
CONDENSED BALANCE SHEETS
($ in thousands)
Assets
Cash on deposit with bank subsidiary
Investment in subsidiaries
Premises and equipment
Other assets
Total assets
Liabilities and shareholders’ equity
Subordinated debt
Trust preferred securities
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
As of December 31,
2023
2022
$
$
$
$
4,597
1,478,750
7
379
1,483,733
27,177
73,130
11,046
111,353
1,372,380
1,483,733
5,611
1,100,829
7
22
1,106,469
—
65,665
9,208
74,873
1,031,596
1,106,469
122
Year Ended December 31,
2023
2022
2021
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Interest income
Dividends from subsidiaries
Total income
Interest expense
Other expenses
Total expense
Income before income taxes and equity in undistributed income of
subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
$
116
32,700
32,816
7,945
2,057
10,002
22,814
(2,076)
24,890
79,241
Net income
$
104,131
48
17,400
17,448
2,926
1,693
4,619
12,829
(960)
13,789
133,147
146,936
24
25,300
25,324
1,455
5,345
6,800
18,524
(1,423)
19,947
75,697
95,644
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
Operating Activities:
Net income
Equity in undistributed earnings of subsidiaries
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
Investing Activities:
Net cash received in acquisitions
Net cash provided by investing activities
Financing Activities:
Payment of common stock cash dividends
Repurchases of common stock
Proceeds from stock option exercises
Stock withheld for payment of taxes
Net cash used in financing activities
Net (decrease) increase in cash
Cash, beginning of year
Cash, end of year
Year Ended December 31,
2022
2021
2023
$
$
104,131
(79,241)
(604)
1,741
26,027
4,123
4,123
(34,940)
—
4,519
(743)
(31,164)
(1,014)
5,611
4,597
146,936
(133,147)
4,055
642
18,486
—
—
(30,660)
—
—
(840)
(31,500)
(13,014)
18,625
5,611
95,644
(75,697)
3,924
(859)
23,012
7,379
7,379
(22,228)
(4,036)
—
(786)
(27,050)
3,341
15,284
18,625
123
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, 2023 and 2022, 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, 2023, 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, 2023 and
2022, and the results of its operations and its cash flows for each of the three years in the period ended December
31, 2023, 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, 2023, 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, 2024 expressed an
adverse opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that: (1)
relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Allowance for Credit Losses
As described in Notes 1 and 4 to the Company's consolidated financial statements, the Company had a gross loan
portfolio of approximately $8.2 billion and related allowance for credit losses of approximately $109.9 million as of
December 31, 2023. The allowance for credit losses consists of quantitative and qualitative components. The
Company considers historical default and loss experience, current and projected economic conditions, asset quality
trends, and known and inherent risks in the portfolio to develop the quantitative component. This quantitative
component is then adjusted for qualitative risk factors that involve management assessments and subjective
assumptions that require a high degree of management’s judgment.
124
We identified management’s judgments and assumptions used in the determination of the qualitative factors as
described in Note 1 and the selection of the appropriate 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 subjective nature of
management’s qualitative assessment, inherent uncertainty involved in forecasting, and the nature and extent of
audit effort required to address these matters, including the extent of specialized skills 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 the
determination of the qualitative factors for collectively evaluated loans by assessing consistent application
of evaluation and conclusions reached, including consideration of contradictory evidence.
Evaluating the relevance and reliability of data used in determining the qualitative factors by comparing the
data to internally developed and third-party sources, and other audit evidence gathered.
Utilizing personnel with specialized skill and knowledge with evaluating the reasonableness of the
macroeconomic forecasts used in the reasonable and supportable forecast period by comparing to third-
party sources.
Acquisition of GrandSouth Bancorporation
As described in Note 2 to the Company’s consolidated financial statements, the Company completed its acquisition
of GrandSouth Bancorporation on January 1, 2023, for a total purchase consideration of $229.5 million, with total
assets acquired of $1.2 billion, liabilities assumed of $1.1 billion and resulting goodwill of $114.5 million.
Determination of the acquisition date fair values of the assets acquired and liabilities assumed requires the
Company to make significant estimates and assumptions. In determining the fair values of loans acquired, the
Company must determine projected prepayment and discount rates, among other assumptions.
We identified the determination of the projected prepayment and discount rate assumptions in the valuation of loans
acquired as a critical audit matter. Auditing these significant assumptions involved especially challenging and
subjective auditor judgment due to the nature and extent of audit effort required to address these matters, including
evaluating the appropriateness of the market data selected and use of specialized skill and knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
•
Testing the completeness and accuracy of the loan level data utilized in the valuation of the acquisition date
fair value of loans acquired by (i) evaluating the reliability of data utilized in the valuation of loans acquired
and (ii) confirming loan level data with borrowers on a sample basis, and agreeing loan level data to
supporting documentation.
Utilizing personnel with specialized skill and knowledge in valuation of loans to assist with evaluation of
projected prepayment and discount rate assumptions used in the valuation of the loans acquired. This
includes utilizing information obtained from market sources to test the assumptions and identify potential
sources of disconfirming information.
/s/ BDO USA, P.C.
We have served as the Company's auditor since 2019.
Philadelphia, Pennsylvania
February 28, 2024
125
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,
2023, 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 did not
maintain, in all material respects, effective internal control over financial reporting as of December 31, 2023, based
on the COSO criteria.
We do not express an opinion or any other form of assurance on management’s statements referring to any
corrective actions taken by the Company after the date of management’s assessment.
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, 2023 and 2022, 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, 2023, and the related notes (collectively referred to as
the “consolidated financial statements”) and our report dated February 28, 2024 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.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. A material weakness regarding management’s
failure to maintain effective information technology general controls in the areas of user access management and
segregation of duties, within an application supporting the Company’s accounting and reporting processes, has
been identified. As a result, many of the Company’s manual controls dependent upon the information derived from
this information technology application were also ineffective, as segregation of duties was not appropriately
designed. This material weakness was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2023 financial statements, and this report does not affect our report dated February 28,
2024 on those financial statements.
126
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.
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, P.C.
Philadelphia, Pennsylvania
February 28, 2024
127
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, as of the evaluation date, due to the material weakness in the
Company's internal control over financial reporting described below, the Company's disclosure controls and
procedures were not effective as of December 31, 2023.
However, after giving full consideration to the material weakness described below, and based on a number of other
factors, including the measures implemented prior to December 31, 2023 to remediate the material weakness in
internal control over financial reporting and the performance of procedures by management designed to ensure that
information required to be disclosed is communicated to our management to allow timely decisions regarding
required disclosure, management has concluded that the consolidated financial statements included in this Report
present fairly, in all material respects, the Company’s financial position, the results of its operations and its cash
flows for each of the periods presented in conformity with GAAP and that disclosures to be made about material
information required to be included in our periodic reports with the SEC were made timely and properly included in
the Report.
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's internal controls over
financial reporting, as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of
1934, was not effective as of December 31, 2023 because of the material weakness in internal control over financial
reporting described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s
annual or interim financial statements will not be prevented or detected on a timely basis.
128
Management identified a material weakness related to information technology general controls in the area of user
access management within an application supporting the Company’s accounting and reporting processes which
resulted in certain segregation of duties conflicts. As such, certain of the Company’s manual business process
controls dependent upon the information derived from this application were also ineffective.
Plan for Remediation of Material Weakness
The Company and its Board of Directors are committed to maintaining a strong internal control environment. During
the fourth quarter of 2023, management identified a control deficiency that constituted a material weakness as of
December 31, 2023. Management evaluated the material weakness described above and the following measures
were implemented during the fourth quarter and in place prior to December 31, 2023:
•
•
Privileged administrative access to the application was removed for finance department personnel.
Additional control design enhancements were implemented for user access provisioning, modification, and
removals from the application to ensure all access changes to the application are subject to formal
documentation and approval.
In addition to the actions taken during the fourth quarter of 2023, management is continuing to implement a
remediation plan to enhance the design of information technology general controls. Specifically, management will
take the following additional measures to further ensure its controls and procedures are operating effectively:
• Ongoing monitoring of enhanced user provisioning controls.
•
Evaluation of resources of finance department, and enhancement of resources and procedures as
necessary to ensure proper segregation of duties within applications that support financial reporting
processes.
While management has taken steps towards implementing remediation plans, several of which occurred prior to
December 31, 2023, the material weakness will not be considered fully remediated until the controls have operated
effectively, as evidenced through testing, for a sufficient amount of time.
BDO USA, P.C., an independent, registered public accounting firm, has audited the Company’s consolidated
financial statements as of and for the year ended December 31, 2023, and audited the Company’s effectiveness of
internal controls over financial reporting as of December 31, 2023, as stated in its reports, which are included in
Item 8 hereof.
Changes in Internal Controls
Except as set forth above, there were no changes in our internal control over financial reporting that occurred during
the three months ended December 31, 2023 that materially affected, or that are reasonably likely to materially affect
our internal control over financial reporting
Item 9B. Other Information
Trading Arrangements of Section 16 Reporting Persons.
During the quarter ended December 31, 2023, no person who is required to file reports pursuant to Section 16(a) of
the Securities and Exchange Act of 1934, as amended, with respect to holdings of, and transactions in, the
Company’s common shares (i.e. directors and certain officers of the Company) maintained, adopted, modified or
terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1(c) arrangement”, as those terms are defined
in Section 229.408 of the regulations of the SEC.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
129
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.
Awards Made To Named Executive Officers
During the fiscal year ended December 31, 2023, the Company did not award an option or other right to purchase or
acquire its common shares during any period beginning four business days before the filing of a periodic report on
Form 10-Q or the filing or furnishing of a report on Form 8-K that disclosed material nonpublic information and
ending one business day after the filing or furnishing of such a report to any the Company’s “named executive
officers” (as such persons are specified in the Company’s Proxy Statements for its 2022 or 2023 Annual Meeting of
Shareholders).
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, 2023, 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, 2023 regarding shares of the Company’s stock that
may be issued pursuant to the Company’s equity-based compensation plan. At December 31, 2023, the Company
had no options, warrants or rights outstanding under any compensation plans.
As of December 31, 2023
(a)
(b)
Number of
securities to
be issued upon
exercise
of outstanding
options,
warrants and
rights
Weighted-
average
exercise price of
outstanding
options,
warrants and
rights
(c)
Number of
securities
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
Plan category
Equity compensation plans approved by security holders (1)
305,585 $
Equity compensation plans not approved by security holders
Total
—
305,585 $
20.95
—
20.95
205,498
—
205,498
_________________
(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.
130
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.
131
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.
Description of the Company's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
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.
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. (*)
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. (*)
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. (*)
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. (*)
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.
2.a
2.b
3.a
3.b
4.a
4.b
10.a
10.b
10.c
10.d
10.e
10.f
10.g
Form of Stock Option and Performance Unit Award Agreement was filed as Exhibit 10 to the Company’s Current Report
on Form 8-K filed on June 23, 2008, and is incorporated herein by reference. (*)
10.h Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K was filed as Exhibit 10.1 to
the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as is incorporated herein by
reference. (*)
10.i
10.j
10.k
10.l
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. (*)
Amended and Restated Employment Agreement by and among the Company and the Bank and Michael G. Mayer
effective February 1, 2022 was filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on January 28,
2022 and is incorporated by reference. (*)
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. (*)
132
10.n
10.o
10.p
10.q
10.r
10.s
21
23
The Executive Nonqualified Excess Plan Adoption Agreement dated January 30, 2017 was filed as Exhibit 10.r to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and is incorporated herein by
reference. (*)
The Executive Nonqualified Excess Plan Adoption Agreement dated February 26, 2018 was filed as Exhibit 10.s to the
Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and is incorporated herein by
reference. (*)
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. (*)
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. (*)
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. (*)
Form of First Amendment to Employment and Change of Control Agreement entered into effective November 6, 2023
with each of its named executive officers was filed as Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2023, and is incorporated herein by reference. (*)
List of Subsidiaries of Registrant
Consent of Independent Registered Public Accounting Firm, BDO USA, P.C.
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.
97
101
Excess Incentive Compensation Recovery Policy dated October 23, 2023
The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31,
2023, 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.
133
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, 2024.
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.
134
/s/ Richard H. Moore
Richard H. Moore
Chief Executive Officer &
Chairman of the Board
February 28, 2024
/s/ James C. Crawford, III
James C. Crawford, III
Lead Independent Director
Director
February 28, 2024
/s/ Mary Clara Capel
Mary Clara Capel
Director
February 28, 2024
/s/ Suzanne DeFerie
Suzanne DeFerie
Director
February 28, 2024
/s/ Abby J. Donnelly
Abby J. Donnelly
Director
February 28, 2024
/s/ Mason Y. Garrett
Mason Y. Garrett
Director
February 28, 2023
/s/ John B. Gould
John B. Gould
Director
February 28, 2024
/s/ Michael G. Mayer
Michael G. Mayer
Director
February 28, 2024
/s/ John W. McCauley
John W. McCauley
Director
February 28, 2024
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, 2024
February 28, 2024
Board of Directors
/s/ Richard H. Moore
Richard H. Moore
Chairman of the Board
Director
February 28, 2024
/s/ Carlie C. McLamb, Jr.
Carlie C. McLamb, Jr.
Director
February 28, 2024
/s/ Dexter V. Perry
Dexter V. Perry
Director
February 28, 2024
/s/ J. Randolph Potter
J. Randolph Potter
Director
February 28, 2023
/s/ O. Temple Sloan, III
O. Temple Sloan, III
Director
February 28, 2024
/s/ Frederick L. Taylor II
Frederick L. Taylor II
Director
February 28, 2024
/s/ Virginia C. Thomasson
Virginia C. Thomasson
Director
February 28, 2024
/s/ Dennis A. Wicker
Dennis A. Wicker
Director
February 28, 2024
135