EDGAR 10-K Filing

Company CIK: 811589
Filing Year: 2021
Filename: 811589_10-K_2021_0000811589-21-000006.json

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ITEM 1. BUSINESS
Item 1. Business
General Description
First Bancorp (the “Company”) is the fifth largest bank holding company headquartered in North Carolina. At December 31, 2020, the Company had total consolidated assets of $7.3 billion, total loans of $4.7 billion, total deposits of $6.3 billion, and shareholders’ equity of $0.9 billion. Our principal activity is the ownership and operation of First Bank (the “Bank”), a state-chartered bank with its main office in Southern Pines, North Carolina.
The Company was incorporated in North Carolina on December 8, 1983, as Montgomery Bancorp, for the purpose of acquiring 100% of the outstanding common stock of the Bank through a stock-for-stock exchange. On December 31, 1986, the Company changed its name to First Bancorp to conform its name to the name of the Bank, which had changed its name from Bank of Montgomery to First Bank in 1985.
The Bank was organized in 1934 and began banking operations in 1935 as the Bank of Montgomery, named for the county in which it operated. Until September 2013, the Bank’s main office was in Troy, North Carolina, located in the center of Montgomery County. In September 2013, the Company and the Bank moved their main offices approximately 45 miles to Southern Pines, North Carolina, in Moore County. As of December 31, 2020, we conducted business from 101 branches covering a geographical area from Florence, South Carolina to the south, to Wilmington, North Carolina to the east, to Kill Devil Hills, North Carolina to the northeast, to Mayodan, North Carolina to the north, and to Asheville, North Carolina to the west. Of the Bank’s 101 branches, 95 branches are in North Carolina and six branches are in South Carolina. Ranked by assets, the Bank was the fifth largest bank headquartered in North Carolina as of December 31, 2020 and one of two banks with total assets between $4 billion and $45 billion.
As of December 31, 2020, the Bank had four wholly owned subsidiaries, First Bank Insurance Services, Inc. (“First Bank Insurance”), SBA Complete, Inc. (“SBA Complete”), Magnolia Financial, Inc. ("Magnolia Financial"), and First Troy SPE, LLC. First Bank Insurance’s primary business activity is the placement of property and casualty insurance coverage. SBA Complete specializes in providing consulting services for financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. Magnolia Financial is a business financing company that offers accounts receivable financing and factoring, inventory financing, and purchase order financing throughout the southeastern United States. First Troy SPE, LLC, which was organized in December 2009, is a holding entity for certain foreclosed properties.
Our principal executive offices are located at 300 SW Broad Street, Southern Pines, North Carolina, 28387, and our telephone number is (910) 246-2500. Unless the context requires otherwise, references to the “Company,” “we,” “our,” or “us” in this Annual Report on Form 10-K shall mean collectively First Bancorp and its consolidated subsidiaries.
General Business
We engage in a full range of banking activities, with the acceptance of deposits and the making of loans being our most basic activities. We offer deposit products such as checking, savings, and money market accounts, as well as time deposits, including various types of certificates of deposits (“CDs”) and individual retirement accounts (“IRAs”). We provide loans for a wide range of consumer and commercial purposes, including loans for business, real estate, personal uses, home improvement and automobiles. We offer residential mortgages through our Mortgage Banking Division, and we offer SBA loans to small business owners across the nation through our SBA Lending Division. We offer accounts receivable financing and factoring, inventory financing, and purchase order financing through Magnolia Financial. We also offer credit cards, debit cards, letters of credit, safe deposit box rentals and electronic funds transfer services, including wire transfers. In addition, we offer internet banking, mobile banking, cash management and bank-by-phone capabilities to our customers, and have a fleet of ATMs across our branch network for the convenience of our customers. We also offer a mobile check deposit feature for our mobile banking customers that allows them to securely deposit checks via their smartphone. For our business customers, we offer remote deposit capture, which provides them with a method to electronically transmit checks received from customers into their bank account without having to visit a branch. We are a member of the Certificate of Deposit Account Registry Service (“CDARS”), which gives our customers the ability to obtain Federal Deposit Insurance Corporation (“FDIC”) insurance on deposits of up to $50 million, while continuing to work directly with their local First Bank branch.
Because the majority of our customers are individuals and small to medium-sized businesses located in the markets we serve, management does not believe that the loss of a single customer or group of customers would have a material adverse impact on the Bank. There are no seasonal factors that tend to have any material effect on the Bank’s business, and we do not rely on foreign sources of funds or income. Because we operate primarily within North Carolina and northeastern South Carolina, the economic conditions of these areas could have a material impact on the Company. See additional discussion below in the section entitled “Territory Served and Competition.”
We also offer various ancillary services as part of our commitment to customer service. Through First Bank Insurance, we offer the placement of property and casualty insurance. We also offer non-FDIC insured investment and insurance products, including mutual funds, annuities, long-term care insurance, life insurance, and company retirement plans, as well as financial planning services through our investments division called FB Wealth Management Services.
First Bank also offers SBA loans to small business owners throughout the nation, which is supported by First Bank’s subsidiary, SBA Complete. SBA Complete specializes in providing consulting services for financial institutions across the country related to SBA loan origination and servicing.
The Company is also the parent to a series of statutory business trusts organized for the purpose of issuing trust preferred debt securities that qualify as regulatory capital. See additional discussion below in the section entitled “Borrowings.”
Territory Served and Competition
Our headquarters are located in Southern Pines, Moore County, North Carolina, where we have a significant concentration of deposits. At the end of 2020, we served regions spread across North Carolina, with additional operations in northeastern South Carolina. The following table presents, for each county where we operated as of December 31, 2020, the number of bank branches operated by the Bank within the county, the approximate amount of deposits with the Bank in the county as of December 31, 2020, our approximate deposit market share at June 30, 2020, and the number of bank competitors located in the county at June 30, 2020.
County Number of
Branches Deposits
(in millions) Market
Share Number of
Competitors
Alamance, NC 1 $ 74 2.5 % 15
Beaufort, NC 2 114 15.7 % 5
Bladen, NC 1 72 13.5 % 4
Brunswick, NC 4 306 9.8 % 10
Buncombe, NC 8 702 10.2 % 16
Cabarrus, NC 2 67 2.1 % 10
Carteret, NC 2 91 5.6 % 9
Chatham, NC 2 71 8.3 % 8
Chesterfield, SC 1 54 11.7 % 6
Columbus, NC 2 88 10.4 % 5
Cumberland, NC 1 44 0.9 % 14
Dare, NC 1 37 2.7 % 8
Davidson, NC 2 184 6.3 % 9
Dillon, SC 3 77 21.6 % 4
Duplin, NC 3 214 20.0 % 6
Florence, SC 2 80 2.9 % 13
Forsyth, NC 4 81 0.8 % 16
Guilford, NC 6 589 4.2 % 21
Harnett, NC 3 159 13.0 % 8
Henderson, NC 2 105 4.3 % 10
Iredell, NC 2 86 2.2 % 19
Lee, NC 3 252 24.3 % 9
Madison, NC 1 48 44.2 % 1
McDowell, NC 1 84 21.8 % 4
Mecklenburg, NC 2 84 0.0 % 30
Montgomery, NC 2 148 40.8 % 2
Moore, NC 10 674 32.0 % 9
New Hanover, NC 5 340 2.6 % 19
Onslow, NC 2 133 8.7 % 10
Pitt, NC 1 52 1.6 % 14
Randolph, NC 3 221 10.4 % 10
Richmond, NC 1 70 13.9 % 5
Robeson, NC 4 253 19.7 % 8
Rockingham, NC 1 32 2.5 % 9
Rowan, NC 1 86 4.0 % 12
Scotland, NC 1 125 28.6 % 5
Stanly, NC 4 166 13.6 % 6
Transylvania, NC 1 32 4.5 % 5
Wake, NC 4 159 0.5 % 32
Brokered Deposits - 20
Total
101 $ 6,274
Historically, our branches and facilities have been primarily located in small to medium-sized communities, whose economies are based primarily on a variety of industries, including services and manufacturing. Leading producers of lumber and rugs are located in Montgomery County, North Carolina. The Pinehurst area within Moore County, North Carolina, is a widely known golf resort and retirement area. The High Point, North Carolina area is widely
known for its furniture market. New Hanover and Brunswick Counties, located in the southeastern coastal region of North Carolina, are popular with tourists and have significant retirement populations. Buncombe County, located in the western region of North Carolina, is a highly diverse area with industries in manufacturing, service, and tourism. Additionally, several of the communities served by the Bank are “bedroom” communities of large cities like Charlotte, Raleigh and Greensboro, while several branches are located in medium-sized cities such as Albemarle, Asheboro, Fayetteville, Greenville, Jacksonville, High Point, Southern Pines, and Sanford.
In recent years, we have implemented a branch strategy of expansion into larger, higher growth markets. In 2016, this expansion continued with additional investments in Charlotte, Raleigh and the Triad region of North Carolina. Several seasoned bankers joined the Bank and have led our expansion efforts in these markets. We opened our first full service branch in Charlotte in August 2016, after opening a loan production office there in 2015. In Raleigh, we opened a loan production office early in 2016 and upgraded that location to a full service branch in April 2017. Additionally, in recent years, we opened two new branches in cities just outside of Raleigh and now have four branches in Wake County. In the Triad region, experienced bankers joined us in early 2016 as we opened our first loan production office in Greensboro. Our expansion into higher growth markets was significantly enhanced by three strategic transactions that occurred in 2016 and 2017. See discussion below in the section entitled “Mergers and Acquisitions.”
We have three counties that hold significant shares of our deposit base. Buncombe County, the former headquarters of one of our 2017 acquisitions (Asheville Savings Bank), holds 11% of our total deposit base. Moore County, the headquarters of the Company, also has total deposits comprising approximately 11% of our deposit base, while Guilford County, the former headquarters of another 2017 acquisition (Carolina Bank), holds 9% of our deposit base. Accordingly, material changes in competition, the economy or the population of these counties could materially impact the Company. No other county comprises more than 10% of our deposit base.
We compete in our various market areas with, among others, several large interstate bank holding companies. These large competitors have substantially greater resources than our Company, including broader geographic markets, higher lending limits and the ability to make greater use of large-scale advertising and promotions. A significant number of interstate banking acquisitions have taken place in the past few years, thus further increasing the size and financial resources of some of our competitors, some of which are among the largest bank holding companies in the nation. In many of our markets, we also compete against smaller, local banks. With banks of all sizes attempting to maximize yields on earning assets, especially in the current low interest rate environment, the competition for high-quality loans remains intense. Accordingly, loan rates in our markets continue to be under competitive pressure. Many of the markets we operate in are particularly competitive markets, with at least ten other financial institutions having a physical presence within those markets.
We compete not only against banking organizations, but also against a wide range of financial service providers, including federally and state-chartered thrift institutions, credit unions, investment and brokerage firms and small-loan or consumer finance companies. One of the credit unions in our market area is among the largest in the nation. Competition among financial institutions of all types is virtually unlimited with respect to legal ability and authority to provide most financial services. We also experience competition from internet loan providers, especially for mortgage loans, and from internet banks, particularly in the area of time deposits.
Despite the competitive market, we believe we have certain advantages over our competition in the areas we serve. Compared to the smaller banks we compete against, we are large enough to be able to more easily absorb higher costs being experienced in the banking industry, particularly regulatory costs and technology costs. We are also able to originate significantly larger loans than many of our smaller bank competitors. In our competition with larger banks, we attempt to maintain a banking culture commonly associated with smaller banks - a culture that has a personal and local flavor that appeals to many retail and small business customers. Specifically, we seek to maintain a distinct local identity in each of the communities we serve, and we actively sponsor and participate in local civic affairs. Most lending and other customer-related business decisions can be made without the delays often associated with larger institutions. Additionally, employment of local managers and personnel in various offices and low turnover of personnel enable us to establish and maintain long-term relationships with individual and corporate customers. Also, due to acquisitions of other banks headquartered in North Carolina and South Carolina, we are one of two banks headquartered in North Carolina with total assets between $4 billion and $45 billion. We believe that enhances several of our competitive advantages discussed above, as well as provides scarcity value from an investor viewpoint.
Lending Policy and Procedures
Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the Bank. Loans are approved under our written loan policy, which provides that lending officers, principally branch managers, have authority to approve loans of various amounts up to $350,000 with lending limits varying depending upon the experience of the lending officer and whether the loan is secured or unsecured. We have seven senior lending officers who have authority to approve secured loans up to $500,000 and each of our three Regional Presidents has authority to approve secured loans up to $1,000,000. Loans up to $8,000,000 are approved by the Bank’s Regional Credit Officers through our Credit Administration Department. The Bank’s President and Chief Credit Officer have authority to approve loans up to $15,000,000, while the President and the Chief Credit Officer have joint authority to approve loans up to $50,000,000. The Bank’s Board of Directors maintains loan authority in excess of the Bank’s in-house limit, currently $50,000,000, and generally approves loans through its Executive Loan Committee. Our legal lending limit to any one borrower is approximately $110 million. All lending authorities are based on the borrower’s Total Credit Exposure (“TCE”), which is an aggregate of the Bank’s lending relationship to the borrower. TCE is based on the borrower’s total credit exposure with the Bank either directly or indirectly through loan guarantees or other borrowing entities related to the borrower through control or ownership.
The Executive Loan Committee reviews and approves loans that exceed the Bank’s in-house limit, loans to executive officers, directors, and their affiliates and, in certain instances, other types of loans. New credit extensions are reviewed daily by our senior management and the Credit Administration Department.
We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action. Lending and credit administration officers and the board of directors meet periodically to review past due loans and portfolio quality, while assuring that the Bank is appropriately meeting the credit needs of the communities it serves. Individual lending officers are responsible for monitoring any changes in the financial status of borrowers and pursuing collection of early-stage past due amounts. For certain types of loans that exceed our established parameters of past due status, the Bank’s Asset Resolution Group assumes the management of the loan, and in some cases we engage a third-party firm to assist in collection efforts.
The Bank has an internal Loan Review Department that conducts on-going and targeted reviews of the Bank’s loan portfolio and assesses the Bank’s adherence to loan policies, risk grading and accrual policies. Reports are generated for management based on these activities and findings are used to adjust risk grades as deemed appropriate. In addition, these reports are shared with the Bank’s Board of Directors. The Loan Review Department also provides training assistance to the Bank’s Training and Credit Administration departments.
To further assess the Bank’s loan portfolio and as a secondary review of the Bank’s Loan Review Department, we also contract with an independent consulting firm to review new loan originations meeting certain criteria, as well as to review risk grades to existing credits meeting certain thresholds. The consulting firm’s observations, comments, and risk grades, including variances with the Bank’s risk grades, are shared with the audit committee of the Company’s board of directors and are considered by management in setting Bank policy, as well as in evaluating the adequacy of our allowance for loan losses. For additional information, see “Allowance for Loan Losses and Loan Loss Experience” under Item 7 below.
Investment Policy and Procedures
We have adopted an investment policy designed to maximize our income from funds not needed to meet loan demand, in a manner consistent with appropriate liquidity and risk objectives. Pursuant to this policy, we may invest in U.S. government and government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, commercial mortgage-backed securities, state and municipal obligations, public housing authority bonds, and, to a limited extent, corporate bonds. We may also invest up to $60 million in time deposits with other financial institutions. Time deposit purchases from any one financial institution exceeding FDIC insurance coverage limits are evaluated as a corporate bond and are subject to the same due diligence requirements as corporate bonds (described below).
In making investment decisions, we do not solely rely on credit ratings to determine the credit-worthiness of an issuer of securities, but we use credit ratings in conjunction with other information when performing due diligence prior to the purchase of a security. Securities that are not rated investment grade will not be purchased. Securities rated below Moody’s BAA or Standard and Poor’s BBB generally will not be purchased. Securities rated below A are periodically reviewed for credit-worthiness. We may purchase non-rated municipal bonds only if such bonds are in our general market area and we determine these bonds have a credit risk no greater than the minimum ratings
referred to above. We are also authorized by our Board of Directors to invest a portion of our securities portfolio in high quality corporate bonds, with the amount of such bonds not to exceed 15% of the entire securities portfolio. Prior to purchasing a corporate bond, the Company’s management performs due diligence on the issuer of the bond, and the purchase is not made unless we believe that the purchase of the bond bears no more risk to the Company than would an unsecured loan to the same company. On a quarterly basis, we review the financial statements for the corporate bond issuers that we own for any signs of deterioration so that we can take timely action if deemed necessary.
Our Chief Investment Officer implements the investment policy, monitors the investment portfolio, recommends portfolio strategies and reports to the Company’s Investment Committee. The Investment Committee generally meets on a quarterly basis to review investment activity and to assess the overall position of the securities portfolio. The Investment Committee compares our securities portfolio with portfolios of other companies of comparable size. In addition, reports of all purchases, sales, issuer calls, net profits or losses and market appreciation or depreciation of the securities portfolio are reviewed by our Board of Directors. Once a quarter, our interest rate risk exposure is evaluated by our Board of Directors. Each year, the written investment policy is approved by the board of directors.
Mergers and Acquisitions
As part of our operations, we have pursued an acquisition strategy over the years to augment our organic growth. We regularly evaluate the potential acquisition of various financial institutions. Our acquisitions have generally fallen into one of three categories: 1) an acquisition of a financial institution or branch thereof within a market in which we operate, 2) an acquisition of a financial institution or branch thereof in a market contiguous or nearly contiguous to a market in which we operate, or 3) an acquisition of a company that has products or services that we do not currently offer. Historically, we have paid for our acquisitions with cash and/or common stock and any operating income or loss has been fully borne by the Company beginning on the closing date of the acquisition.
Since becoming a public company in 1987, we have completed numerous acquisitions in each of the three categories described above. We have completed several whole-bank traditional acquisitions in our existing and contiguous markets; we have purchased a number of bank branches from other banks (both in existing market areas and in contiguous/nearly contiguous markets); and we have acquired several insurance agencies, which has provided us with the ability to offer property and casualty insurance coverage. Also, as discussed below, we acquired companies that specialize in SBA loans and business financing, which brought new products and services to the Company.
In 2009, FDIC-assisted acquisitions began to occur frequently as banking regulators closed problem banks. In FDIC-assisted transactions, the acquiring bank often does not pay any consideration for the failed bank, and in some cases receives cash from the FDIC as part of the transaction. In addition, the acquiring bank usually enters into one or more loss share agreements with the FDIC, which affords the acquiring bank significant loss protection. In both 2009 and 2011 we acquired the operations of failed banks in FDIC-assisted transactions. See the Company’s Annual Reports on Form 10-K for those years for more information on these acquisitions.
The following paragraphs describe the other acquisitions that we have completed in recent years. See the respective Company’s Annual Reports on Form 10-K for more information on the acquisitions discussed below.
In January 2016, we acquired Bankingport, Inc., an insurance agency based in Sanford, North Carolina. Although not material to the Company’s consolidated operations, the acquisition provided us with the opportunity to enhance our product offerings, as well as expand our insurance agency operations into a significant banking market for our Company. Also, this acquisition provided us a larger platform for leveraging insurance services throughout our bank branch network.
In May 2016, we completed the acquisition of SBA Complete. SBA Complete specializes in consulting with financial institutions across the country related to SBA loan origination and servicing. Many community banks do not have the in-house capability to comprehensively originate and service those types of loans, so they contract with SBA Complete for assistance. To learn more about this subsidiary of the Bank, please visit www.sbacomplete.com. Information included on our Internet site is not incorporated by reference into this annual report.
Soon after the acquisition of SBA Complete, we leveraged its capabilities by launching our own SBA Lending Division. Through a network of specialized First Bank loan officers, this Division offers SBA loans to small business owners throughout the United States. We typically sell the portion of each loan that is guaranteed by the SBA at a premium and record the non-guaranteed portion to our balance sheet. To learn more about our SBA Lending
Division, please visit www.firstbanksba.com. Information included on our Internet site is not incorporated by reference into this annual report.
In March 2016, we announced an agreement to exchange our seven Virginia branches, with approximately $151 million in loans and $134 million in deposits, for six North Carolina branches of a community bank with a large Virginia presence that included approximately $152 million in loans and $111 million in deposits. Four of the six branches we assumed were in Winston-Salem, with the other two branches located in the Charlotte-metro markets of Mooresville and Huntersville. The Winston-Salem branches we assumed improved the Triad expansion initiative, while the Mooresville and Huntersville branches increased our Charlotte market expansion. This transaction, which was completed in July 2016, resulted in our exit from western Virginia. The opportunity to assume what is essentially a banking franchise in markets where we had recently invested in human capital was the primary factor we considered in entering into the exchange agreement.
In March 2017, we acquired Carolina Bank Holdings, Inc. (“Carolina Bank”), the parent company of Carolina Bank. Carolina Bank was a community bank headquartered in Greensboro with $682 million in assets, with eight branches located in Greensboro, Winston-Salem, Burlington and Asheboro. This acquisition built on the Winston-Salem expansion previously discussed and significantly accelerated our recent expansion initiative in the Greensboro market.
In September 2017, we acquired Bear Insurance Services, an insurance agency based in Albemarle, North Carolina. This acquisition provided us a larger platform for leveraging insurance services throughout our bank branch network and more than doubled our insurance agency revenue.
In October 2017, we acquired ASB Bancorp, Inc. (“Asheville Savings Bank”), the parent company of Asheville Savings Bank, SSB. Asheville Savings Bank operated in the attractive and high-growth market of Asheville, North Carolina, with $798 million in assets and 13 branches located throughout the Asheville market area.
On September 1, 2020, we completed the acquisition of Magnolia Financial, Inc., a business financing company headquartered in Spartanburg, South Carolina, that makes loans throughout the southeastern United States. Magnolia Financial held $14.6 million in loans at the date of acquisition. Although not material to our Company’s consolidated operations, the acquisition provides us with the opportunity to enhance our product offerings, such as accounts receivable financing and factoring, inventory financing, and purchase order financing.
There are many factors that we consider when evaluating how much to offer for potential acquisition candidates, with a few of the more significant factors being projected impact on earnings per share, projected impact on capital, and projected impact on book value and tangible book value. Significant assumptions that affect this analysis include the estimated future earnings stream of the acquisition candidate, estimated credit and other losses to be incurred, the amount of cost efficiencies that can be realized, and the interest rate earned/lost on the cash received/paid. In addition to these primary factors, we also consider other factors including (but not limited to) marketplace acquisition statistics, location of the candidate in relation to our expansion strategy, market growth potential, management of the candidate, potential integration issues (including corporate culture), and the size of the acquisition candidate.
We plan to continue to evaluate acquisition opportunities that could potentially benefit the Company and its shareholders. These opportunities may include acquisitions that do not fit the categories discussed above.
Human Capital Resources
As of December 31, 2020, we had 1,071 full-time and 47 part-time employees. We are not a party to any collective bargaining agreements, and we consider our employee relations to be good.
Oversight of our corporate culture is an important element of our Board of Director’s oversight of risk because our people are critical to the success of our corporate strategy. Our board sets the “tone at the top,” and holds senior management accountable for embodying, maintaining, and communicating our culture to employees. Our culture is guided by a philosophy we call Our Promise to Service Excellence. The principles of Our Promise to Service Excellence are: Safety & Soundness, Knowledge and Accuracy, Courteous Service, and Convenience and Ease.
We have developed specialized training that all new associates receive, and we hold regular team meetings and training that promote our Service Excellence principals. By emphasizing a consistent set of principles that all employees follow, we believe that our employees work experience is more satisfying, and they are better able to serve their customers consistently and at a high level. We have a Service Excellence Committee that on an annual
basis selects Service Excellence Champions, who have been nominated for the award throughout the year by fellow employees, based on their demonstrated commitment to Our Promise to Service Excellence.
Our employees are key to our success as an organization. We are committed to attracting, retaining and promoting top quality talent regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion and physical ability. We strive to identify and select the best candidates for all open positions based on qualifying factors for each job. We are dedicated to providing a workplace for our employees that is inclusive, supportive, and free of any form of discrimination or harassment; rewarding and recognizing our employees based on their individual results and performance; and recognizing and respecting all of the characteristics and differences that make each of our employees unique. In 2020, we formed a Diversity Council, which is chaired by our Chief Executive Officer and meets regularly. The Diversity Council is focused on recommending actions for the improvement related to three key objectives, and for identifying barriers that impede progress in the following areas:
•Create a work environment that demonstrates all views are respected and provides equal access to opportunities for growth and advancement.
•Ensure all open positions have a diverse pool of candidates, and our job requirements align with the markets we serve.
•Create internal organizational learning opportunities in which associates may voluntarily participate to deepen and develop personal understanding of diversity, equity and inclusion.
In October 2020, we encouraged our employees to participate in "Global Diversity Awareness Month." Team activity guides promoting diversity and learning about other cultures were distributed to promote this initiative.
We also seek to design careers with our company that are fulfilling ones, with competitive compensation and benefits alongside a positive work-life balance. We dedicate resources to fostering professional and personal growth with continuing education, on-the-job training and development programs.
We have worked closely with our employees during the pandemic to ensure their safety and their ability to take care of their family. Health safety protocols were established, remote work arrangements were facilitated and considerations were provided for family needs, such as child care, all without any employee layoffs or furloughs.
Supervision and Regulation
As a bank holding company, we are subject to supervision, examination and regulation by the Federal Reserve and the North Carolina Office of the Commissioner of Banks (the “Commissioner”). The Bank is also subject to supervision and examination by the Federal Reserve and the Commissioner. For additional information, see Note 15 to the consolidated financial statements.
Supervision and Regulation of the Company
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended and is regulated by the Federal Reserve. The Company is also regulated by the Commissioner under the North Carolina banking laws.
A bank holding company is required to file quarterly reports and other information regarding its business operations and those of its subsidiaries with the Federal Reserve. It is also subject to examination by the Federal Reserve and is required to obtain Federal Reserve approval prior to making certain acquisitions of other institutions or voting securities. The Federal Reserve requires the Company to maintain certain levels of capital - see “Capital Resources and Shareholders’ Equity” under Item 7 below. The Federal Reserve also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the Federal Reserve. The Federal Reserve generally prohibits a bank holding company from declaring or paying a cash dividend that would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements which might adversely affect a bank holding company’s financial position. Under the Federal Reserve policy, a bank holding company is not permitted to continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition.
The Commissioner is empowered to regulate certain acquisitions of North Carolina banks and bank holding companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules necessary to effectuate the purposes of those banking laws.
Regulatory authorities have cease and desist powers over bank holding companies and their nonbank subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. Those authorities may compel holding companies to invest additional capital into banking subsidiaries upon acquisitions or in the event of significant loan losses or rapid growth of loans or deposits.
The U.S. Congress and the North Carolina General Assembly have periodically considered and adopted legislation that has impacted the Company.
Supervision and Regulation of the Bank
The Bank is a state-chartered bank and is a member of the Federal Reserve.
Federal banking regulations applicable to all depository financial institutions, among other things: (i) provide federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict preferential loans by banks to “insiders” of banks; (iii) require banks to keep information on loans to major shareholders and executive officers; and (iv) bar certain director and officer interlocks between financial institutions.
As a state-chartered bank, the Bank is subject to the provisions of the North Carolina banking statutes and to regulation by the Commissioner. The Commissioner has a wide range of regulatory authority over the activities and operations of the Bank, and the Commissioner’s staff conducts periodic examinations of the Bank and its affiliates to ensure compliance with state banking laws and regulations and to assess the safety and soundness of the Bank. Among other things, the Commissioner regulates the merger of state-chartered banks, the payment of dividends, loans to officers and directors, recordkeeping, types and amounts of loans and investments, and the establishment of branches. The Commissioner also has cease and desist powers over state-chartered banks for violations of state banking laws or regulations and for unsafe or unsound conduct that is likely to jeopardize the interest of depositors.
The dividends that may be paid by the Bank to the Company are subject to legal limitations under North Carolina law. In addition, under Federal Reserve regulations, a dividend cannot be paid by the Bank if it would be less than well-capitalized after the dividend. The Federal Reserve may also prevent the payment of a dividend by the Bank if it determines that the payment would be an unsafe and unsound banking practice. The ability of the Company to pay dividends to its shareholders is largely dependent on the dividends paid to the Company by the Bank.
The Federal Reserve is authorized to approve conversions, mergers, and assumptions of deposit liability transactions between insured banks and uninsured banks or institutions, and to prevent capital or surplus diminution in such transactions if the resulting, continuing, or assumed bank is an insured member bank. First Bank is a member of the Federal Reserve System, and accordingly the Federal Reserve also conducts periodic examinations of the Bank to assess its safety and soundness and its compliance with banking laws and regulations, and it has the power to implement changes to, or restrictions on, the Bank’s operations if it finds that a violation is occurring or is threatened. In addition, the Federal Reserve monitors the Bank’s compliance with several banking statutes, such as the Depository Institution Management Interlocks Act and the Community Reinvestment Act of 1977.
FDIC Insurance
As an FDIC insured depository institution, our deposits are insured up to applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the United States Government. The basic deposit insurance level is generally $250,000, as specified in FDIC regulations. For this protection, each insured bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC.
The FDIC insurance premium is based on an institution’s total assets minus its Tier 1 capital. An institution’s premiums are determined based on its capital, supervisory ratings and other factors. Premium rates generally may increase if the FDIC deposit insurance fund is strained due to the cost of bank failures and the number of troubled banks. In addition, if the Bank experiences financial distress or operates in an unsafe or unsound manner, its deposit premiums may increase.
We recognized approximately $1.7 million, $0.3 million, and $2.3 million in FDIC insurance expense in 2020, 2019, and 2018, respectively. In November 2018, the FDIC announced that the Deposit Insurance Fund (“DIF”) reserve ratio exceeded the statutory minimum of 1.35% as of September 30, 2018. Among other things, this resulted in the
FDIC awarding assessment credits for banks with less than $10 billion in total assets that had contributed to the DIF in prior years. We were notified in January 2019 that we had received $1.35 million in credits that would be available to offset deposit insurance assessments once the DIF reached 1.38%. The DIF reached 1.38% as of June 30, 2019 and therefore, the FDIC began to apply the Bank’s credits to our quarterly deposit insurance assessments beginning with the second quarter of 2019. Our credits became fully utilized during the first quarter of 2020, and thus our FDIC insurance expense increased in 2020 compared to 2019. We expect our FDIC insurance expense to increase in 2021 due to a full year of expense and increases in total assets during 2020.
The FDIC may conduct examinations of and require reporting by FDIC-insured institutions. It may also prohibit an institution from engaging in any activity that it determines by regulation or order to pose a serious risk to the deposit insurance fund and may terminate the Bank’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
Legislative and Regulatory Guidance and Developments
In addition to the regulations that are described above, new legislation is introduced from time to time in the U.S. Congress that may affect our operations. In addition, the regulations governing the Company and the Bank may be amended from time to time by the Federal Reserve, the Commissioner, the FDIC, the Securities and Exchange Commission (the “SEC”), or other agencies, as appropriate. Any legislative or regulatory changes, or changes to accounting standards, in the future could adversely affect our operations and financial condition.
Regulatory Capital Requirement under Basel III
The Company and the Bank are subject to regulatory capital rules agreed to by the Basel Committee on Banking Supervision in the accord referred to as “Basel III.” Under the Basel III Capital Rules, the following were the initial minimum capital ratios applicable to the Company and the Bank as of January 1, 2015:
•4.5% CET1 to risk-weighted assets;
•6.0% Tier I capital (that is, CET1 plus Additional Tier I capital) to risk-weighted assets;
•8.0% total capital (that is, Tier I capital plus Tier II capital) to risk-weighted assets; and
•4.0% Tier I leverage ratio (that is Tier I capital) to quarterly average total assets.
Common Equity Tier I capital (“CET1”) is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier I capital is comprised of CET1 capital plus Additional Tier I capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier I capital plus certain adjustments, the largest of which for the Company and the Bank is the allowance for loan losses. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company and the Bank, adjusted for their related risk levels using formulas set forth in Federal Reserve regulations
The Basel III Capital Rules include a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). Thus, effective as of January 1, 2019, the Company and the Bank were required to maintain this additional capital conservation buffer of 2.5% of CET1, resulting in the following minimum capital ratios:
•4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%;
•6.0% Tier I capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum Tier I capital ratio of at least 8.5%;
•8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of at least 10.5%; and
•4.0% Tier I leverage ratio
In addition to the minimum capital requirements described above, the regulatory framework for prompt corrective action also contains specific capital guidelines for a bank’s classification as “well capitalized.” The current specific guidelines are as follows:
•CET1 Capital Ratio of at least 6.50%;
•Tier I Capital Ratio of at least 8.00%;
•Total Capital Ratio of at least 10.00%; and a
•Leverage Ratio of at least 5.00%.
If a bank falls below “well capitalized” status in any of these four ratios, it must ask for FDIC permission to originate or renew brokered deposits. First Bank is well-capitalized under all capital guidelines.
Current Expected Credit Loss Accounting Standard
The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard related to reserving for credit losses. This standard, referred to as Current Expected Credit Loss (or “CECL”), requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts. As originally contemplated by CECL, we would have adopted this new standard on January 1, 2020. However, the CARES Act and subsequent legislation provided companies with the option to delay the implementation of CECL until as late as January 1, 2022. We expect to adopt CECL as of January 1, 2021. The Company will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings. Future adjustments to credit loss expectations will be recorded through the income statement as charges or credits to earnings. At this time, the Company expects its allowance for credit losses will increase by approximately $12-14 million upon adoption and that its reserve for unfunded commitments will increase by $6-$7 million.
The Federal Reserve and the FDIC have adopted a rule that provides a banking organization the option to phase-in over a three-year period the effects of CECL on its regulatory capital upon the adoption of the standard. Due to the expected insignificant impact to the Company's overall capital levels at adoption, the Company does not expect to exercise the phase-in option.
Liquidity Requirements
Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. Liquidity risk management has become increasingly important since the financial crisis. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements incent banking entities to increase their holdings of Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.
In October 2018, the federal bank regulators proposed to revise their liquidity requirements so that banking organizations that are not global systematically important banks and have less than $250 billion in total consolidated assets and less than $75 billion in each of off-balance sheet exposure, nonbank assets, cross-jurisdictional activity and short-term wholesale funding would not be subject to any LCR or NSFR requirements. Accordingly, these regulations do not currently apply to the Company or the Bank.
Financial Privacy and Cybersecurity
The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted
through diversified financial companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. The Company has multiple Information Security Programs that reflect the requirements of this guidance. If, however, we fail to observe the regulatory guidance in the future, we could be subject to various regulatory sanctions, including financial penalties.
In October 2016, the federal banking regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that are intended to increase the operational resilience of large and interconnected entities under their supervision. If established, the enhanced cyber risk management standards would be designed to help reduce the potential impact of a cyber-attack or other cyber-related failure on the financial system. The advance notice of proposed rulemaking addresses five categories of cyber standards: (i) cyber risk governance; (ii) cyber risk management; (iii) internal dependency management; (iv) external dependency management; and (v) incident response, cyber resilience, and situational awareness. In May 2019, the Federal Reserve announced that it would revisit the Advance Notice of Proposed Rulemaking ("ANPR") in the future. In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” The Notice of Proposed Rulemaking also would require specific and immediate notifications by bank service providers that become aware of similar incidents.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.
Anti-Money Laundering and the USA Patriot Act
A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the "USA Patriot Act""), substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering
and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious financial, legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; 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 the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate- income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. In order for a financial holding company to commence any new activity permitted by the BHC Act, or to acquire any company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the CRA. Furthermore, banking regulators take into account CRA ratings when considering a request for an approval of a proposed transaction. First Bank received a rating of “satisfactory” in its most recent CRA examination.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the Federal Reserve Board did not join in that proposed rulemaking. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its CRA regulations. In September 2020, the Federal Reserve issued an ANPR that invites public comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA. The ANPR seeks feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and address inequities in credit access. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time.
Federal Securities Laws
The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, the Company is subject to the reporting, information disclosure, proxy solicitation, insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act. This includes limits on sales of stock by certain insiders and the filing of insider ownership reports with the SEC. The SEC and Nasdaq have adopted regulations under the Sarbanes-Oxley Act of 2002 and the Dodd
Frank Act that apply to the Company as a Nasdaq-traded, public company, which seek to improve corporate governance, provide enhanced penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings.
Available Information
We maintain a corporate Internet site at www.LocalFirstBank.com, which contains a link within the “Investor Relations” section of the site to each of our filings with the SEC, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These filings are available, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings can also be accessed at the SEC’s website located at www.sec.gov. Information included on our Internet site is not incorporated by reference into this annual report.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
An investment in our common stock involves certain risks. Before you invest in our common stock, you should be aware that there are various risks, including those described below, which could affect the value of your investment in the future. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. The risk factors described in this section, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that could have a material adverse effect on our business, including our operating results and financial condition. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially or adversely affect our business, financial condition, and results of operations. The value or market price of our common stock could decline due to any of these identified or other unidentified risks.
Risks Related to Our Business
The COVID-19 pandemic has impacted the local economies in the communities we serve and our business, and the extent and severity of the impact on our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has negatively impacted the local, national, and global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. The duration of the COVID-19 pandemic and its effects cannot be determined with certainty, but the effects could be present for an extended period of time.
Since the onset of the pandemic, the majority of state and local jurisdictions have imposed, and others in the future may impose, varying levels of restrictions, including “shelter-in-place” orders, quarantines, executive orders and similar government orders to control the spread of COVID-19.
The COVID-19 pandemic and the institution of social distancing and sheltering-in-place requirements resulted in temporary closures of, or operating restrictions, on many businesses. While many of the closed businesses reopened at varying levels of capacity, a resurgence of the pandemic may result in future restrictions or closures. As a result, the demand for our products and services may be significantly impacted. Furthermore, the COVID-19 pandemic has influenced and may continue to influence the recognition of credit losses in our loan portfolios and our allowance for credit losses, particularly as some businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Our operations may also be disrupted if significant portions of our workforce are unable to work effectively, including due to illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic.
The extent to which the COVID-19 pandemic has a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
Unfavorable economic conditions could adversely affect our business.
Our business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on our operations
and financial condition. Our banking operations are primarily locally oriented and community-based. Our retail and commercial banking activities are primarily concentrated within the same geographic footprint. Our markets include most of North Carolina and northeastern South Carolina. Worsening economic conditions within our markets could have a material adverse effect on our financial condition, results of operations and cash flows. Accordingly, we expect to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets we serve. Unfavorable changes in unemployment, real estate values, interest rates and other factors could weaken the economies of the communities we serve. While economic growth and business activity has been generally favorable in our market area in recent years, there can be no assurance that economic conditions will persist, and these conditions could worsen. In addition, unfavorable global economic conditions, including the 2020 outbreak of COVID-19, have had a negative impact on financial markets and could adversely impact our customers, which in turn could lead to lower business activity and higher loan delinquencies. Weakness in any of our market areas could have an adverse impact on our earnings, and consequently our financial condition and capital adequacy.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third party service providers. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.
Our allowance for loan losses may not be adequate to cover actual losses; under CECL we may need to materially increase our allowance for loan losses and our provisions for credit losses may increase significantly and the provisions for credit losses may be more volatile than in the past.
Like all financial institutions, we maintain an allowance for loan losses to provide for probable losses caused by customer loan defaults. The allowance for loan losses may not be adequate to cover actual loan losses, and in this case additional and larger provisions for loan losses would be required to replenish the allowance. Provisions for loan losses are a direct charge against income.
We establish the amount of the allowance for loan losses based on historical loss rates, as well as estimates and assumptions about the ultimate amount of incurred losses that will be realized. Because of the extensive use of estimates and assumptions, our actual loan losses could differ, possibly significantly, from our estimate. We believe that our allowance for loan losses at December 31, 2020 is adequate to provide for probable losses, but it is possible that the allowance for loan losses will need to be increased for credit reasons or that regulators will require us to increase this allowance. Either of these occurrences could materially and adversely affect our earnings and profitability.
In addition, the measure of our allowance for loan losses is dependent on the adoption of new accounting standards. The FASB issued an Accounting Standards Update related to CECL, the new credit impairment model, which we expect to adopt as of January 1, 2021. This new model requires financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for probable incurred losses up to the balance sheet date. Under the CECL model, credit deterioration will be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.
The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts. The Company will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. At this time, as a
result of the adoption, the Company expects its allowance for credit losses will increase by approximately $12-$14 million and that its reserve for unfunded commitments will increase by $6-$7 million.
The CECL standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. Providing for losses over the life of our loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred. This change may require us to increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses. It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.
We are subject to extensive regulation, which could have an adverse effect on our operations.
We are subject to extensive regulation and supervision from the Commissioner and the Federal Reserve. This regulation and supervision is intended primarily to enhance the safe and sound operation of the Bank and for the protection of the FDIC insurance fund and our depositors and borrowers, rather than for holders of our equity securities. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets and the determination of the level of allowance for loan losses. Changes in the regulations that apply to us, or changes in our compliance with regulations, could have a material impact on our operations.
We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations and related enforcement actions.
The federal BSA, the USA 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 the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators also have begun to focus on compliance with 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 could also have serious reputational consequences for us.
Consumers may decide not to use banks to complete their financial transactions.
Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
Negative public opinion regarding our Company and the financial services industry in general, could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion regarding our Company and the financial services industry in general, is inherent in our business. Negative public opinion can result from actual or alleged conduct in any number of activities, including lending practices, corporate governance
and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action. Although we have taken steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.
We may make future acquisitions, which could dilute current shareholders’ stock ownership and expose us to additional risks.
In accordance with our strategic plan, we evaluate opportunities to acquire other banks, branch locations and companies that provide products and services related to our banking activities to expand the Company. As a result, we may engage in acquisitions and other transactions that could have a material effect on our operating results and financial condition, including short and long-term liquidity. Our acquisition activities could require us to issue a significant number of shares of common stock or other securities and/or to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized.
Our acquisition activities could involve a number of additional risks, some of which are described in more detail elsewhere in this report and include:
•the possibility that expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve;
•incurring the time and expense associated with identifying and evaluating potential acquisitions and merger partners and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business;
•using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;
•incurring the time and expense required to integrate the operations and personnel of the combined businesses;
•the possibility that we will be unable to successfully implement integration strategies, due to challenges associated with integrating complex systems, technology, banking centers, and other assets of the acquired bank in a manner that minimizes any adverse effect on customers, suppliers, employees, and other constituencies;
•the possibility of regulatory approval for the acquisition being delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues surrounding the Company, the target institution or the proposed combined entity as a result of, among other things, issues related to AML and BSA compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, or CRA requirements, and the possibility that any such issues associated with the target institution, which we may or may not be aware of at the time of the acquisition, could impact the combined entity after completion of the acquisition;
•the possibility that the acquisition may not be timely completed, if at all;
•creating an adverse short-term effect on our results of operations; and
•losing key employees and customers as a result of an acquisition that is poorly received.
If we do not successfully manage these risks, our acquisition activities could have a material adverse effect on our operating results and financial condition, including short- and long-term liquidity.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and
we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and investment banks. Defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. We can make no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.
We are subject to interest rate risk, which could negatively impact earnings.
Net interest income is the most significant component of our earnings. Our net interest income results from the difference between the yields we earn on our interest-earning assets, primarily loans and investments, and the rates that we pay on our interest-bearing liabilities, primarily deposits and borrowings. When interest rates change, the yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities do not necessarily move in tandem with each other because of the difference between their maturities and repricing characteristics. This mismatch can negatively impact net interest income if the margin between yields earned and rates paid narrows. Interest rate environment changes can occur at any time and are affected by many factors that are outside our control, including inflation, recession, unemployment trends, the Federal Reserve’s monetary policy, domestic and international disorder and instability in domestic and foreign financial markets.
In the normal course of business, we process large volumes of transactions involving millions of dollars. If our internal controls fail to work as expected, if our systems are used in an unauthorized manner, or if our employees subvert our internal controls, we could experience significant losses.
We process large volumes of transactions on a daily basis involving millions of dollars and are exposed to numerous types of operational risk. Operational risk includes the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems and breaches of the internal control system and compliance requirements. This risk also includes potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards.
We establish and maintain systems of internal operational controls that provide us with timely and accurate information about our level of operational risk. Although not foolproof, these systems have been designed to manage operational risk at appropriate, cost-effective levels. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. From time to time, losses from operational risk may occur, including the effects of operational errors. We continually monitor and improve our internal controls, data processing systems, and corporate-wide processes and procedures, but there can be no assurance that future losses will not occur.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity.
Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations or deterioration in credit markets.
If our goodwill becomes impaired, we may be required to record a significant charge to earnings.
We have goodwill recorded on our balance sheet as an asset with a carrying value as of December 31, 2020 of $239.3 million. Under generally accepted accounting principles, goodwill is required to be tested for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount - see Note 6 to the consolidated financial statements for discussion of interim testing during 2020 that we performed. The test for goodwill impairment
involves comparing the fair value of a company’s reporting units to their respective carrying values. We have three reporting units - 1) First Bank with $227.6 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill. The price of our common stock is one of several factors available for estimating the fair value of our reporting units and is most closely associated with our First Bank reporting unit. Subject to the results of other valuation techniques, if the price of our common stock falls below book value, it could indicate that a portion of our goodwill is impaired. Accordingly, for this reason or other reasons that indicate that the goodwill at any of our reporting units is impaired, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined, which could have a negative impact on our results of operations.
We might be required to raise additional capital in the future, but that capital may not be available or may not be available on terms acceptable to us when it is needed.
We are required to maintain adequate capital levels to support our operations. In the future, we might need to raise additional capital to support growth, absorb loan losses, or meet more stringent capital requirements. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot be certain of our ability to raise additional capital in the future if needed or on terms acceptable to us. If we cannot raise additional capital when needed, our ability to conduct our business could be materially impaired.
We may issue additional shares of stock or equity derivative securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.
Our authorized capital includes 40,000,000 shares of common stock and 5,000,000 shares of preferred stock. As of December 31, 2020, we had 28,579,335 shares of common stock outstanding. In addition, as of December 31, 2020, we had the ability to issue 549,876 shares of common stock pursuant to options and restricted stock under our existing equity compensation plan.
Subject to applicable NASDAQ rules, our board generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose. Such corporate purposes could include, among other things, issuances of equity-based incentives under or outside of our equity compensation plans, issuances of equity in business combination transactions, and issuances of equity to raise additional capital to support growth or to otherwise strengthen our balance sheet. Any issuance of additional shares of stock or equity derivative securities will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock. Shares we issue in connection with any such offering will increase the total number of outstanding shares and may dilute the economic and voting ownership interest of our existing shareholders.
We may be adversely impacted by the transition from LIBOR as a reference rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.
We have a significant number of loans and borrowings with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
Future acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Future acquisitions by the Company, particularly those of financial institutions, are subject to approval by a variety of federal and state regulatory agencies. The process for obtaining these required regulatory approvals has become substantially more difficult in recent years. Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to AML and BSA compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, CRA issues, and other similar laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on our business, and, in turn, our financial condition and results of operations.
We may be exposed to difficulties in combining the operations of acquired businesses into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.
We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our acquisition activities. Inherent uncertainties exist in integrating the operations of an acquired business. In addition, the markets and industries in which the Company and our potential acquisition targets operate are highly competitive. We may lose customers or the customers of acquired entities as a result of an acquisition. We also may lose key personnel from the acquired entity as a result of an acquisition. We may not discover all known and unknown factors when examining a company for acquisition during the due diligence period. These factors could produce unintended and unexpected consequences for us. Undiscovered factors as a result of acquisition, pursued by non-related third party entities, could bring civil, criminal, and financial liabilities against us, our management, and the management of those entities acquired. These factors could contribute to the Company not achieving the expected benefits from its acquisitions within desired time frames.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, the Consumer Finance Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our CRA rating and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on or delays in approving merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
We could experience losses due to competition with other financial institutions.
We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, thrifts, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries, such as online lenders and banks. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
Our ability to compete successfully depends on a number of factors, including, among other things:
•the ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;
•the ability to expand our market position;
•the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
•the rate at which we introduce new products and services relative to our competitors;
•customer satisfaction with our level of service; and
•industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Failure to keep pace with technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
New lines of business or new products and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
In May 2016, we completed the acquisition of SBA Complete. SBA Complete specializes in consulting with financial institutions across the country related to SBA loan origination and servicing. We leveraged the expertise assumed in the acquisition of SBA Complete to launch our own SBA Lending Division in the third quarter of 2016. These are both relatively new lines of business for the Bank with unique operational, control and accounting risks, which if not properly managed, could result in losses for our Company.
In September 2020, we completed the acquisition of Magnolia Financial, which offers accounts receivable financing and factoring, inventory financing and purchase-order financing. This line of business is new for the Bank and has unique operational, control and accounting risks, which if not properly managed, could result in losses for our Company.
Our reported financial results are impacted by management’s selection of accounting methods and certain assumptions and estimates.
Our accounting policies and methods are fundamental to the way we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include: the allowance for loan losses; intangible assets; and the fair value and discount accretion of acquired loans.
Changes in accounting standards could materially impact our financial statements.
From time to time accounting standards setters change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results or a cumulative charge to retained earnings. See Note 1 - Recent Accounting Pronouncements in the notes to consolidated financial statements included in Item 8. Financial Statements.
Our business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, our business and a negative impact on our results of operations.
We rely heavily on communications and information systems to conduct our business. Our daily operations depend on the operational effectiveness of our technology. We rely on our systems to accurately track and record our assets and liabilities. Any failure, interruption or breach in security of our computer systems or outside technology, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity, cyber attacks or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems leading to inaccurate financial records. This could materially affect our business operations and financial condition. While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of any failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations.
In addition, the Bank provides its customers the ability to bank online and through mobile banking. The secure transmission of confidential information over the Internet is a critical element of online and mobile banking. While we use qualified third party vendors to test and audit our network, our network could become vulnerable to unauthorized access, computer viruses, phishing schemes and other security issues. The Bank may be required to spend significant capital and other resources to alleviate problems caused by security breaches or computer viruses. To the extent that the Bank’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Bank to claims, litigation, and other potential liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Bank’s systems and could adversely affect its reputation and its ability to generate deposits.
Additionally, we outsource the processing of our core data system, as well as other systems such as online banking, to third party vendors. Prior to establishing an outsourcing relationship, and on an ongoing basis thereafter, management monitors key vendor controls and procedures related to information technology, which includes reviewing reports of service auditor’s examinations. If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations.
We rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to maintain our day-to-day operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable contractual arrangements or service level agreements. We maintain a system of policies and procedures designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure, (ii) changes in the vendor’s financial condition and (iii) changes in the vendor’s support for existing products and services. While we believe these policies and procedures help to mitigate risk, and our vendors are not the sole source of service, the failure of an external vendor to perform in accordance with applicable contractual
arrangements or the service level agreements could be disruptive to our operations, which could have a material adverse impact on our business and its financial condition and results of operations.
We are subject to losses due to errors, omissions or fraudulent behavior by our employees, clients, counterparties or other third parties.
We are exposed to many types of operational risk, including the risk of fraud by employees and third parties, clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially and adversely affected if employees, clients, counterparties or other third parties caused an operational breakdown or failure, either as a result of human error, fraudulent manipulation or purposeful damage to any of our operations or systems.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a client, we may assume that the client’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the client. Our financial condition and results of operations could be negatively affected to the extent we rely on financial statements that do not comply with GAAP or are materially misleading, any of which could be caused by errors, omissions, or fraudulent behavior by our employees, clients, counterparties, or other third parties.
Risks Related to the Company’s Common Stock
There can be no assurance that we will continue to pay cash dividends.
Although we have historically paid cash dividends, there is no assurance that we will continue to pay cash dividends. Future payment of cash dividends, if any, will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, economic conditions, and such other factors as the board may deem relevant.
Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.
Although our common stock is listed for trading in The NASDAQ Global Select Market under the symbol “FBNC”, the trading volume in our common stock is lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the relatively low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.
Our stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including the risk factors discussed elsewhere in this report that are outside of our control and which may occur regardless of our operating results.
An investment in the Company’s common stock is not an insured deposit.
The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you could lose some or all of your investment.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None

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ITEM 2. PROPERTIES
Item 2. Properties
The main offices of the Company and the Bank are located in a three-story building in the central business district of Southern Pines, North Carolina and is owned by the Bank. The building houses administrative facilities. The Bank’s Operations Division, including customer accounting functions, offices for information technology operations, and offices for loan operations, are primarily housed in buildings in Troy, North Carolina and Greensboro, North Carolina, which are owned by the Bank. At December 31, 2020, the Company operated 101 bank branches. The Company owned all of its bank branch premises except nine branch offices for which the land and buildings are leased and eight branch offices for which the land is leased but the building is owned. The Bank also leases several other office locations for administrative functions. We also lease several locations for our SBA related activities and for our insurance subsidiary. There are no options to purchase or lease additional properties. The Company considers its facilities adequate to meet current needs and believes that lease renewals or replacement properties can be acquired as necessary to meet future needs.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosure
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Our common stock trades on The NASDAQ Global Select Market under the trading symbol “FBNC”. Tables 1 and 21 included in “Management’s Discussion and Analysis” below provide historic information on the market price for the Company’s common stock. As of December 31, 2020, there were approximately 2,300 shareholders of record and another 8,350 shareholders whose stock is held in “street name.”
Tables 1 and 21 include information regarding cash dividends declared per share of common stock for the periods presented. For each quarter in 2020, we declared a cash dividend of $0.18 per common share. For the foreseeable future, it is our current intention to continue to pay regular cash dividends on a quarterly basis. However, our ability to pay future cash dividends can be restricted or eliminated by regulatory authorities. See Note 15 to the Consolidated Financial Statements and "Capital Resources and Shareholders' Equity" section in Item 7 for additional discussion.
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the five-year period commencing December 31, 2015 and ending December 31, 2020, with the cumulative total return of the Russell 2000 Index (reflecting overall stock market performance of small-capitalization companies) and an index of banks with between $5 billion and $10 billion in assets, as constructed by SNL Securities, LP (reflecting changes in banking industry stocks). The graph and table assume that $100 was invested on December 31, 2015 in each of the Company’s common stock, the Russell 2000 Index, and the SNL Bank Index, and that all dividends were reinvested.
First Bancorp Comparison of Five-Year Total Return Performances (1)
Five Years Ending December 31, 2020
Total Return Index Values (1)
December 31,
2015 2016 2017 2018 2019 2020
First Bancorp
$ 100.00 147.11 193.30 180.73 224.09 195.60
Russell 2000
100.00 121.31 139.08 123.76 155.35 186.36
SNL Index-Banks between $5 billion and $10 billion
100.00 143.27 142.73 129.17 160.06 145.37
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(1)Total return indices were provided from an independent source, SNL Securities LP, Charlottesville, Virginia, and assume initial investment of $100 on December 31, 2015, reinvestment of dividends, and changes in market values. Total return index numerical values used in this example are for illustrative purposes only.
Issuer Purchases of Equity Securities
Pursuant to authorizations by the Company’s Board of Directors, the Company has from time to time repurchased shares of common stock in private transactions and in open-market purchases.
Issuer Purchases of Equity Securities
Period Total Number of Shares
Purchased Average Price
Paid Per Share Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs (1) Maximum Number of Shares (or Approximate Dollar Value)
That May Yet Be Purchased
Under the Plans or Programs
(1)
Month #1 (October 1, 2020 to October 31, 2020) 57,774 $ 23.69 57,774 $ 9,929,958
Month #2 (November 1, 2020 to November 30, 2020) 73,639 $ 24.42 73,639 $ 8,131,572
Month #3 (December 1, 2020 to December 31, 2020) - $ - - $ 8,131,572
Total 131,413 $ 24.10 131,413 $ 8,131,572
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(1)All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. The share repurchase authorization for the 2020 repurchases expired on December 31, 2020. On January 27, 2021, the Company reported the authorization of a new $20 million repurchase program with an expiration date of December 31, 2021.
Also see “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 12.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Consolidated Financial Data
Table 1 on page 60 of this report sets forth the selected consolidated financial data for the Company.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis is intended to assist readers in understanding our results of operations and changes in financial position for the past three years. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes beginning on page 78 of this report and the supplemental financial data contained in Tables 1 through 21 beginning on page 60 of this report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of the Company.
Overview - 2020 Compared to 2019
We reported net income per diluted common share of $2.81 in 2020, a 9.4% decrease compared to 2019. Our outstanding loan balances increased by 6.2% and our total deposits increased 27.2%.
Financial Highlights
($ in thousands except per share data) 2020 2019 Change
Earnings
Net interest income
$ 218,122 216,204 0.9 %
Provision for loan losses 35,039 2,263 1,448.3 %
Noninterest income
81,346 59,529 36.6 %
Noninterest expenses
161,298 157,194 2.6 %
Income before income taxes
103,131 116,276 (11.3) %
Income tax expense
21,654 24,230 (10.6) %
Net income
$ 81,477 92,046 (11.5) %
Net income per common share
Basic
$ 2.81 3.10 (9.4) %
Diluted
2.81 3.10 (9.4) %
Balances At Year End
Assets
$ 7,289,751 6,143,639 18.7 %
Loans
4,731,315 4,453,466 6.2 %
Deposits
6,273,596 4,931,355 27.2 %
Ratios
Return on average assets
1.20 % 1.53 %
Return on average common equity
9.32 % 11.32 %
Net interest margin (taxable-equivalent)
3.56 % 4.00 %
For the year ended December 31, 2020, the Company recorded net income of $81.5 million, or $2.81 per diluted common share compared to $92.0 million, or $3.10 per diluted common share, for 2019. Earnings for 2020 were impacted by a higher provision for loan losses related to estimated losses arising from the economic impact of COVID-19. The impact of the higher provisions for loan losses were partially offset by higher noninterest income realized in 2020.
Net interest income for the year ended December 31, 2020 amounted to $218.1 million, a 0.9% increase from the $216.2 million recorded in 2019. The increase in net interest income in 2020 was primarily due to growth in average interest-earning assets, which increased by approximately 13.1% during the year as a result of funds received from our high deposit growth, and which offset a lower net interest margin. Also, see the section entitled "Net Interest Income" for additional information.
Our net interest margin (a non-GAAP measure calculated by dividing tax-equivalent net interest income by average earning assets) was 3.56% compared to 4.00% for 2019. The lower 2020 margin was primarily due to the impact of lower interest rates and the lower incremental reinvestment rates realized from the funds received from our high deposit growth.
We recorded a provision for loan losses of $35.0 million compared to $2.3 million for 2019. The increase in 2020 was primarily related to estimated probable losses arising from the economic impact of COVID-19.
For the years ended December 31, 2020 and 2019, total noninterest income was $81.3 million and $59.5 million, respectively. The increase primarily related to 1) increased fees from presold mortgages due to higher mortgage origination activity, 2) gains on sales of securities, and 3) higher SBA consulting fees associated with the Paycheck Protection Program ("PPP") loan program. See the section entitled "Noninterest Income" for additional information.
Noninterest expenses for the years ended December 31, 2020 and 2019, amounted to $161.3 million and $157.2 million, respectively, an increase of 2.6% in 2020. The increase was primarily due to higher mortgage commission expense resulting from increases in mortgage loan volume in 2020. See the section entitled "Noninterest Expense" for additional information.
Total assets at December 31, 2020 amounted to $7.3 billion, a 18.7% increase from a year earlier. The growth was driven by an increase in deposits of $1.3 billion, or 27.2% during 2020. In addition to deposits arising from PPP loans, we believe this high deposit growth was due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives. Loan growth for 2020 was $278 million, or 6.2%, which included $241 million in PPP loans. Loan growth in 2020 was negatively impacted by a number of large commercial loan payoffs, as well as high levels of refinanced mortgage loans.
With the excess liquidity resulting from the high deposit growth, during 2020 we paid down our borrowings by $239 million, or 79.4%, and reduced our level of brokered deposits by $66 million, or 76.5%. We also purchased investment securities, with total investment securities amounting to $1.6 billion at December 31, 2020, an increase of $731 million, or 82.1%, compared to a year earlier.
During 2020, we repurchased 1,117,208 shares of the Company's common stock at an average stock price of $28.53, which totaled $31.9 million.
Overview - 2019 Compared to 2018
We reported net income per diluted common share of $3.10 in 2019, a 3.0% increase compared to 2018. Our outstanding loan balances increased by 4.8% and total deposits increased 5.8%.
Financial Highlights
($ in thousands except per share data) 2019 2018 Change
Earnings
Net interest income
$ 216,204 207,430 4.2 %
Provision (reversal) for loan losses
2,263 (3,589) n/m
Noninterest income
59,529 58,942 1.0 %
Noninterest expenses
157,194 156,483 0.5 %
Income before income taxes
116,276 113,478 2.5 %
Income tax expense
24,230 24,189 0.2 %
Net income
$ 92,046 89,289 3.1 %
Net income per common share
Basic
$ 3.10 3.02 2.6 %
Diluted
3.10 3.01 3.0 %
Balances At Year End
Assets
$ 6,143,639 5,864,116 4.8 %
Loans
4,453,466 4,249,064 4.8 %
Deposits
4,931,355 4,659,339 5.8 %
Ratios
Return on average assets
1.53 % 1.57 %
Return on average common equity
11.32 % 12.27 %
Net interest margin (taxable-equivalent)
4.00 % 4.09 %
n/m - not meaningful
For the year ended December 31, 2019, we recorded net income of $92.0 million, or $3.10 per diluted common share, an increase of 3% in earnings per share from the $89.3 million, or $3.01 per diluted common share, for 2018. The higher earnings in 2019 were primarily related to higher net interest income associated with our growth.
Net interest income for the year ended December 31, 2019 amounted to $216.2 million, a 4.2% increase from the $207.4 million recorded in 2018. The increase in net interest income was primarily due to growth in interest-earning assets. Also, see the section entitled “Net Interest Income” for additional information.
Our net interest margin (tax-equivalent net interest income divided by average earning assets) was 4.00% for 2019 compared to 4.09% for 2018. The decrease in the net interest margin realized in 2019 was primarily due to a combination of lower loan discount accretion and funding costs that rose by more than asset yields.
We recorded a provision for loan losses of $2.3 million in 2019 compared to negative provision for loan losses of $3.6 million (reduction of the allowance for loan losses) in 2018. The negative provision for 2018 was due primarily to several large loan recoveries realized in the first quarter of 2018 totaling $3.7 million.
For the year ended December 31, 2019, noninterest income amounted to $59.5 million compared to $58.9 million for 2018, an increase of 1.0%. Increases were experienced in i) service charges on deposit accounts due to strong deposit growth, ii) interchange income due to increased credit and debit card usage, and iii) in fees from presold mortgages due to higher mortgage origination activity. Those increases were substantially offset by lower SBA loan sale gains and lower SBA consulting fees. See the section entitled “Noninterest Income” for additional information.
Noninterest expenses for the year ended December 31, 2019 amounted to $157.2 million compared to $156.5 million in 2018, an increase of 0.5%. A 5.4% increase in salaries expense associated with wage increases and the growth of the Company was substantially offset by lower merger and acquisition expenses and lower intangibles amortization expense. See the section entitled “Noninterest Expense” for additional information.
Total assets at December 31, 2019 amounted to $6.1 billion, a 4.8% increase from a year earlier. Loan growth for the year ended December 31, 2019 amounted to $204.4 million, or 4.8%, and deposit growth amounted to $272.0 million, or 5.8%. Within deposits, our retail deposits (excludes brokered deposits and internet time deposits) grew 9.7% during 2019, with 14.8% growth in noninterest-bearing checking accounts. As a result of the strong retail deposit growth, we reduced our level of brokered deposits by $153.7 million, or 64.1%, from $239.9 million at December 31, 2018 to $86.1 million at December 31, 2019. Internet time deposits decreased from $3.4 million at December 31, 2018 to $0.7 million at December 31, 2019. Additionally, we paid down borrowings by $106 million, or 26.0%, during 2019.
During 2019, we repurchased 281,593 shares of the Company's common stock at an average price of $35.51, which totaled $10 million.
Recent Developments Related to COVID-19
Overview. Our business has been, and continues to be, impacted by COVID-19. In March 2020, COVID-19 was declared a pandemic by the World Health Organization and a national emergency by the President of the United States. Efforts to limit the spread of COVID-19 have included shelter-in-place orders, the closure of non-essential businesses, travel restrictions, supply chain disruptions and prohibitions on public gatherings, among other things, throughout many parts of the United States and, in particular, the markets in which we operate. As the current pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, its severity; the duration of the outbreak; the impact to our customers, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken, or inaction by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). COVID-19 has negatively affected, and is expected to continue to negatively affect, our business, financial position and operating results. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but could be increasingly material.
Impact on our Operations. In the State of North Carolina, many jurisdictions declared health emergencies. The resulting closures and/or limited operations of non-essential businesses and related economic disruption have impacted our operations as well as the operations of our customers. Financial services have been identified as a Critical Infrastructure Sector by the Department of Homeland Security. Accordingly, our business remains open. To address the issues arising as a result of COVID-19, and in order to facilitate the continued delivery of essential
services while maintaining a high level of safety for our customers as well as our employees, we have implemented our Business Continuity Plans. Among other things, significant actions taken under these plans include:
•Implemented our communications plans to ensure our employees, customers and critical vendors are kept abreast of developments affecting our operations.
•After temporarily closing all of our financial center lobbies and other corporate facilities to non-employees, except for certain limited cases by appointment only, we reopened our financial center lobbies in late May 2020. Those facilities remain open, with limited exceptions.
•Expanded remote-access availability so that a significant portion of our workforce has the capability to work from home or other remote locations. All activities are performed in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded.
•Instituted mandatory social distancing policies and mask protocols for those employees not working remotely. Members of certain operations teams have been split into two teams that rotate their work location between work and home.
Notwithstanding the foregoing actions, the COVID-19 outbreak could still, among other things, greatly affect our routine and essential operations due to staff absenteeism, particularly among key personnel; further limit access to or result in further closures of our branch facilities and other physical offices; exacerbate operational, technical or security-related risks arising from a remote workforce; and result in adverse government or regulatory agency orders. The business and operations of our third-party service providers, many of whom perform critical services for our business, could also be significantly impacted, which in turn could impact us. As a result, we are currently unable to fully assess or predict the extent of the effects of COVID-19 on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.
Impact on our Financial Position and Results of Operations. Our financial position and results of operations are particularly susceptible to the ability of our loan customers to meet loan obligations, the availability of our workforce, the availability of our vendors and the decline in the value of assets held by us. While its effects continue to materialize, the COVID-19 pandemic has resulted in a decrease in commercial activity throughout our market area, as well as nationally. This decrease in commercial activity has increased the risk that certain customers (including businesses and individuals), vendors and counterparties will be unable to meet existing payment or other obligations to us. The national public health crisis arising from the COVID-19 pandemic (and public expectations about it), could further destabilize the financial markets and geographies in which we operate. Due to the expectation of higher borrower defaults, we recorded an elevated provision for loan losses in 2020. See further information related to the risk exposure of our loan portfolio under the sections captioned "Provision for Loan Losses," “Loans,” and “Allowance for Loan Losses” elsewhere in this discussion.
In addition, the economic pressures and uncertainties arising from the COVID-19 pandemic have resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. Consumers affected by COVID-19 may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis and certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to return to full social interaction. We lend to customers operating in such industries including retail/strip centers, hotels/lodging, restaurants, entertainment and commercial real estate, among others, that have been significantly impacted by COVID-19 and we are continuing to monitor these customers closely. To help mitigate the adverse effects of COVID-19, loan customers may apply for a deferral of payments, or portions thereof, for up to 90 days. After 90 days, customers may apply for an additional deferral. Additionally, the temporary closures of bank branches and the safety precautions implemented at re-opened branches could result in consumers becoming more comfortable with technology and devaluing face-to-face interaction. Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors. The potential changes in behaviors driven by COVID-19 also present heightened liquidity risks, for example, arising from increased demand for our products and services (such as unusually high draws on credit facilities) or decreased demand for our products and services.
Legislative and Regulatory Developments. Recent actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to mitigate the economic effects of COVID-19 will also have an impact on our financial position and results of operations. These actions are further discussed below.
In an emergency measure aimed at blunting the economic impact of COVID-19, the Federal Reserve lowered the target for the federal funds rate to a range of between zero to 0.25% effective in March 2020. Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Our earnings can be adversely affected by decreases in market interest rates if the interest rates received on loans and other investments fall more quickly and to a larger degree than the interest rates paid on deposits and other borrowings. The decline in interest rates has already led to new all-time low yields across the US Treasury maturity curve. In September 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time, with the majority of the members of the Federal Reserve Open Market Committee expecting short-term interest rates to be near zero through 2023.
Other actions taken by the Federal Reserve in an effort to provide monetary stimulus to counteract the economic disruption caused by COVID-19 include:
•Expanded reverse repo operations, adding liquidity to the banking system.
•Restarted quantitative easing.
•Lowered the interest rate on the discount window by 1.50% to 0.25%.
•Reduced reserve requirement ratios to zero percent.
•Encouraged banks to use their capital and liquidity buffers to lend.
•Introduced and expanded several new programs that will operate on a temporary basis to help preserve market liquidity.
The U.S. government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by the COVID-19. The Phase 1 legislation, the Coronavirus Preparedness and Response Supplemental Appropriations Act ("CARES Act"), was enacted on March 6, 2020 and, among other things, authorized funding for research and development of vaccines and allocated money to state and local governments to aid containment and response measures. The Phase 2 legislation, the Families First Coronavirus Response Act, was enacted on March 18, 2020 and provides for paid sick/medical leave, establishes no-cost coverage for coronavirus testing, expands unemployment benefits, expands food assistance, and provides additional funding to states for the ongoing economic consequences of the pandemic, among other provisions. Phase 3 legislation of the CARES Act was enacted on March 27, 2020. Among other provisions, the CARES Act (i) authorized the Secretary of the Treasury to make loans, loan guarantees and other investments, up to $500 billion, for assistance to eligible businesses, states and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a $349 billion loan program called the Paycheck Protection Program (“PPP”) for loans to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments, (iii) provided certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provides eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) expanded tele-health services in Medicare. The Phase 3.5 legislation, the Paycheck Protection Program and Healthcare Enhancement Act of 2020 (the “PPPHE Act”), was enacted on April 24, 2020. Among other things, the PPPHE Act provided an additional $310 billion of funding for the PPP of which, $30 billion is specifically allocated for use by banks and other insured depository institutions that have assets between $10 billion and $50 billion.
The Paycheck Protection Program Flexibility Act of 2020” (“PPPF Act”) was enacted in June 2020 and modified the PPP as follows: (i) established a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree; (ii) extended the “covered period” of the CARES Act from June 30, 2020, to December 31, 2020; (iii) extended the eight-week “covered period” for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination or December 31, 2020; (iv) extended the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by the SBA; (v) changed requirements such that the borrower must use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the loan; (vi) delayed from June 30, 2020 to December 31, 2020 the date by which employees must be rehired to avoid a reduction in the amount of forgiveness of a loan, and creates a “rehiring safe harbor” that allows businesses to remain eligible for loan forgiveness if they make a good faith attempt to rehire employees or hire similarly qualified employees, but are
unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures; and (vii) allows borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose which of the two would be more advantageous.
In July 2020, the CARES Act was amended to extend, through August 8, 2020, the SBA’s authority to make commitments under the PPP. The SBA’s existing authority had previously expired on June 30, 2020. In August 2020, President Trump signed four executive actions to provide additional COVID-19 relief. The first action authorized the Lost Wages Assistance Program (“LWAP”), which provides for a $400-per-week payment to those currently receiving more than $100 a week in unemployment benefits due to disruptions caused by COVID-19. The LWAP per-week payment was retroactive to the week ending August 1, 2020. The second executive action extended the moratorium on payments and interest accrual on student loans held by the government until the end of 2020. The moratorium was previously set to expire September 30, 2020. The third action instructed the Department of the Treasury and the Department of Housing and Urban Development to help provide temporary assistance to renters and homeowners and promote their ability to avoid eviction or foreclosure, including forbearance of monthly mortgage payments for up to 180 days. The fourth executive action allows employers to defer, for the period from September 1, 2020 through December 31, 2020, the employee portion of Social Security payroll taxes for certain individuals earning less than approximately $104 thousand per year.
In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, and the Economic Aid Act were enacted to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID-19 pandemic. Among other things, the legislation includes (i) payments of $600 for individuals making up to $75,000 per year, (ii) extension of the Federal Pandemic Unemployment Compensation program to include a $300 weekly enhancement in unemployment benefits beginning after December 26, 2020 up to March 14, 2021, (iii) a temporary and targeted rental assistance program, and extends the eviction moratorium through January 31, 2021, (iv) targeted funding related to transportation, education, agriculture, nutrition and other public health measures and (v) approximately $325 billion for small business relief, including approximately $284 billion for a second round of PPP loans and a new simplified forgiveness procedure for PPP loans of $150,000 or less. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.
The Federal Reserve created various additional lending facilities and expanded existing facilities to help provide financing in response to the financial disruptions caused by COVID-19. The programs include, among others, the Paycheck Protection Program Liquidity Facility (“PPP Facility”), which is intended to extend loans to banks making PPP loans. The Federal Reserve announced extensions through March 31, 2021 for several of its lending facilities, including the PPP Facility, that were generally scheduled to expire on or around December 31, 2020. As more fully discussed in the section captioned “Loans” elsewhere in this document, we are currently participating in the PPP as a lender. We have not participated in the PPP Facility.
Banks and bank holding companies have been particularly impacted by the COVID-19 pandemic as a result of disruption and volatility in the global capital markets. This disruption has impacted our cost of capital and may adversely affect our ability to access the capital markets if we need or desire to do so and, although the ultimate impact cannot be reliably estimated at this time in light of the uncertainties and ongoing developments noted herein, such impacts could be material. Furthermore, bank regulatory agencies have been (and are expected to continue to be) proactive in responding to both market and supervisory concerns arising from the COVID-19 pandemic as well as the potential impact on customers, especially borrowers. As shown during and following the financial crisis of 2007-2008, periods of economic and financial disruption and stress have, in the past, resulted in increased scrutiny of banking organizations. We are closely monitoring the potential for new laws and regulations impacting lending and funding practices as well as capital and liquidity standards. Such changes could require us to maintain significantly more capital, with common equity as a more predominant component, or manage the composition of our assets and liabilities to comply with formulaic liquidity requirements.
Outlook for 2021
Due to the COVID-19 pandemic, our outlook for 2021 is uncertain. We believe our local economies and business conditions will continue to be negatively impacted by the pandemic. While the U.S. Government continues to implement measures to help offset the negative financial impact of the pandemic, we expect the negative impact to continue through at least the first half of 2021. If the COVID-19 vaccination is effective and becomes more widely available and pandemic conditions improve, we expect our customer behaviors will return to more normal conditions
and commercial activity to improve. Under that scenario, we expect an increase in traditional loan demand (non-PPP) and that deposits will decline as customer cash balances return to more normal levels. We expect that the growth from traditional loan demand will be substantially offset in our aggregate loan portfolio by forgiveness of the $241 million in PPP loans that were outstanding at December 31, 2020. We expect that interest rates will remain very low and that our net interest margin will be pressured down as a result of the maturity of securities and loans that were originated in periods of higher interest rates. Our ability to further reduce funding costs is limited by their already low levels.
Critical Accounting Policies
The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for loan losses, intangible assets, and the fair value and discount accretion of acquired loans are three policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements.
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.
Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on individually evaluated “impaired loans.” A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the original loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled debt restructured status, purchased credit impaired status, and type of collateral) and the loan is determined to be impaired. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.
The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk grade and estimated loss percentages are assigned to each loan pool based on historical losses. The historical loss percentages are then adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not captured by historical data such. In 2020, we have included environmental factors related to the COVID-19 pandemic. See additional discussion the "Summary of Loan Loss Experience."
The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for general reserve loans. This becomes our “allocated allowance.” The allocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to absorb losses inherent in the portfolio is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded. Any remaining difference between the allocated allowance and the actual allowance for loan losses recorded on our books is our “unallocated allowance.”
Purchased loans are recorded at fair value at the acquisition date. Therefore, amounts deemed uncollectible at the acquisition date represent a discount to the loan value and become a part of the fair value calculation. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan and this accretion is referred to as “loan discount accretion.”
Within the purchased loan portfolio, loans are deemed purchased credit impaired at acquisition if the bank believes it will not be able to collect all contractual cash flows. Performing loans with an unamortized discount or premium
that are not deemed purchased credit impaired are considered to be purchased performing loans. Purchased credit impaired loans are individually evaluated as impaired loans, as described above, while purchased performing loans are evaluated as general reserve loans. For purchased performing loan pools, any computed allowance that is in excess of remaining net discounts is a component of the allocated allowance.
Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.
For further discussion, see “Nonperforming Assets” and “Allowance for Loan Losses and Provision for Loan Losses” below.
We had originally expected to adopt CECL on January 1, 2020. However, congressional legislation passed in March 2020 and December 2020 resulted in the option to delay CECL until as late as January 1, 2022. We expect to adopt CECL on January 1, 2021. See Note 1 to the Consolidated Financial Statements for additional discussion of this matter.
Intangible Assets
Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements.
When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.
The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency or a consulting firm, as we did in 2016 and 2017, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis. For SBA Complete, the consulting firm we acquired in 2016, the identifiable intangible asset related to the customer list was determined to have a life of approximately seven years, with amortization occurring on a straight-line basis.
At December 31, 2020, we had three reporting units - 1) First Bank with $227.6 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.
Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, we test goodwill for impairment annually on October 31 or on an interim basis if an event triggering impairment may have occurred, by comparing the fair value of our reporting units to their related carrying value, including goodwill. The economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's
stock price and market capitalization. We believed such decreases were a triggering indicator requiring an interim goodwill impairment quantitative analysis. Accordingly, during each quarter of 2020, we reviewed our goodwill for impairment. For the first and third quarters of 2020, we performed an interim step-one goodwill impairment quantitative analysis. In performing the quantitative goodwill impairment analysis, we used a combination of market and income approaches for First Bank, the market approach for First Bank Insurance and the income approach for SBA activities. All inputs used in these approaches were evaluated by management at the evaluation date. For the second quarter of 2020 and the annual fourth quarter 2020 review, management reviewed its goodwill for impairment primarily qualitatively by reviewing the factors and assumptions used in the analysis for the preceding quarter. The conclusion of each review was that none of our goodwill was impaired.
We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.
Fair Value and Discount Accretion of Acquired Loans
We consider the determination of the initial fair value of acquired loans and the subsequent discount accretion of the purchased loans to involve a high degree of judgment and complexity.
We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant accounting guidance. However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods. Because of inherent credit losses and interest rate marks associated with acquired loans, the amount that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. For non-impaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for accounting for loan origination fees and costs.
For purchased credit-impaired (“PCI”) loans, the excess of the cash flows initially expected to be collected over the fair value of the loans at the acquisition date (i.e., the accretable yield) is accreted into interest income over the estimated remaining life of the loans using the effective yield method, provided that the timing and the amount of future cash flows is reasonably estimable. Accordingly, such loans are not classified as nonaccrual and they are considered to be accruing because their interest income relates to the accretable yield recognized under accounting for PCI loans and not to contractual interest payments. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference.
Subsequent to an acquisition, estimates of cash flows expected to be collected are updated periodically based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. If there is a decrease in cash flows expected to be collected, the provision for loan losses is charged, resulting in an increase to the allowance for loan losses. If the Company has a probable increase in cash flows expected to be collected, we will first reverse any previously established allowance for loan losses and then increase interest income as a prospective yield adjustment over the remaining life of the loan. The impact of changes in variable interest rates is recognized prospectively as adjustments to interest income.
Merger and Acquisition Activity
See Note 2 to the consolidated financial statements for additional information.
ANALYSIS OF RESULTS OF OPERATIONS
Net interest income, the “spread” between earnings on interest-earning assets and the interest paid on interest-bearing liabilities, constitutes the largest source of our earnings. Other factors that significantly affect operating results are the provision for loan losses, noninterest income such as service fees and noninterest expenses such as salaries, occupancy expense, equipment expense and other overhead costs, as well as the effects of income taxes.
Net Interest Income
Net interest income on a reported basis amounted to $218.1 million in 2020, $216.2 million in 2019, and $207.4 million in 2018. For internal purposes and in the discussion that follows, we evaluate our net interest income on a tax-equivalent basis by adding the tax benefit realized from tax-exempt loans and securities to reported interest income. Net interest income on a tax-equivalent basis amounted to $219.6 million in 2020, $217.8 million in 2019, and $209.0 million in 2018. Management believes that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest amounts in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest income.
($ in thousands) Year ended December 31,
2020 2019 2018
Net interest income, as reported
$ 218,122 216,204 207,430
Tax-equivalent adjustment
1,468 1,641 1,594
Net interest income, tax-equivalent
$ 219,590 217,845 209,024
Table 2 analyzes our net interest income. Our net interest income on a tax-equivalent basis increased by 0.8% in 2020 and 4.2% in 2019. There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances and 2) our net interest margin. “Net interest margin” is a ratio we use to measure the spread between the yield on our earning assets and the cost of our funding and is calculated by dividing tax-equivalent net interest income by average earning assets.
The increase in net interest income in 2020 compared to 2019 was primarily due to the incremental earnings associated with the growth in our levels of interest-earning assets. For 2020, average interest-earning assets increased $711.7 million, or 13.1%, including growth of $356.4 million in average loans and $250.4 million in average securities. The growth in interest-earning assets was driven by funds provided from growth in deposits.
The impact on earnings of the interest-earning asset growth was substantially offset by a decrease in our net interest margin, which declined from 4.00% in 2019 to 3.56% in 2020. The lower net interest margin was a result of excess liquidity, as well as the impact of lower interest rates. During 2020, our level of average securities and other short-term investments increased by $705.7 million, or 93.9%. The investment yields realized with the new funds in those asset classes was low, generally less than 1.50%, and thus negatively impacted the net interest margin. Additionally, from August 2019 to March 2020, the Federal Reserve cut interest rates by 225 basis points, which resulted in our loan yields declining by more than our cost of funds. In 2020, loan yields decreased by 55 basis points, from 5.08% in 2019 to 4.53% in 2020, while average funding costs decreased by only 32 basis points in 2020, from 0.66% in 2019 to 0.34% in 2020.
During 2020, our average balance of PPP loans was $167.3 million. Those loans carry a 1% coupon rate and we also amortize fees that we received from the SBA when we originated the loans. That amortization amounted to $4.1 million in 2020 and when combined with the 1% note rate resulted in a 3.56% yield for those loans, and thus did not significantly impact overall loan yields. At December 31, 2020, we had $6.0 million in remaining deferred PPP origination fees that will be recognized over the lives of the loans, with accelerated amortization expected to result from the loan forgiveness process, substantially all of which we expect will occur over the first half of 2021. Also see the section "Paycheck Protection Program (PPP) Loans" below for additional discussion.
The increase in net interest income in 2019 compared to 2018 was primarily due to growth in our interest-earning assets. For 2019, average interest-earning assets increased $336.0 million, or 6.6%, including growth of $184.5 million in average loans and $281.3 million in average securities. The growth in interest-earning assets was driven by funds provided from growth in deposits. Our net interest margin decreased from 4.09% in 2018 to 4.00% in 2019, which partially offset the positive impact on net interest income of the growth of our interest-earning assets. The lower net interest margin was a result of our funding costs increasing by more than our asset yields, largely as
a result of competitive pressures in deposit pricing. In 2019, asset yields increased by seven basis points, from 4.52% in 2018 to 4.59% in 2019, primarily as a result of Federal Reserve interest rate increases during the second half of 2018, while average funding costs increased by 18 basis points in 2019, from 0.48% in 2018 to 0.66% in 2019.
The net interest margin for all periods benefited, by varying amounts, from the net accretion income, primarily associated with purchase accounting premiums/discounts associated with acquisitions. As can be seen in the table below, we recorded $6.2 million in 2020, $6.0 million in 2019, and $7.1 million in 2018 in net accretion that increased net interest income.
($ in thousands) Year Ended
December 31,
2020 Year Ended
December 31,
2019 Year Ended
December 31,
Interest income - increased by accretion of loan discount on acquired loans
$ 3,817 4,588 6,090
Interest income - increased by accretion of loan discount on retained SBA loans
2,511 1,386 861
Interest expense - reduced by premium amortization of deposits
100 190 372
Interest expense - increased by discount accretion of borrowings
(181) (181) (181)
Impact on net interest income
$ 6,247 5,983 7,142
The biggest component of the purchase accounting adjustments in each year was loan discount accretion on purchased loans, which amounted to $3.8 million in 2020, $4.6 million in 2019, and $6.1 million in 2018. Most of this loan discount accretion relates to our 2017 acquisitions of Carolina Bank and Asheville Savings Bank, with the declines in accretion being due to the natural paydowns in those acquired loan portfolios, which is expected to continue. In addition to the loan discount accretion recorded on acquired loans, we recorded loan discount accretion of $2.5 million, $1.4 million, and $0.9 million in 2020, 2019, and 2018, respectively, on the discounts associated with the retained unguaranteed portions of SBA loans sold in the secondary market. We entered that line of business in late 2016 and the higher discount accretion on those loans is associated with the continued growth in that business.
At December 31, 2020, 2019, and 2018, unaccreted loan discount on purchased loans amounted to $8.9 million, $12.7 million, and $17.3 million, respectively. At December 31, 2020, 2019, and 2018, unaccreted loan discount on SBA loans amounted to $7.3 million, $7.1 million, and $5.7 million, respectively.
Table 3 presents additional detail regarding the estimated impact that changes in loan and deposit volumes and changes in the interest rates we earned/paid had on our net interest income in 2019 and 2020. For 2020, higher loan volume positively impacted interest income by $17.1 million, and lower interest rates on loans negatively impacted interest income by $24.8 million, which resulted in a decline in loan interest income of $7.7 million. Higher volumes of total securities balances resulted in $6.1 million in additional interest income in 2020, which was almost completely offset by the impact of lower interest rates earned on those securities. Lower interest rates on short-term investments (primarily overnight funds) in 2020 resulted in $6.7 million in lower interest income, which was partially offset by higher volume. Lower interest rates paid on deposits drove a $8.7 million decrease in deposit interest expense in 2020. Lower levels of borrowings and lower interest rates paid on borrowings resulted in a decrease in borrowings interest expense of $5.6 million in 2020. Overall, as Table 3 indicates, net interest income grew $1.9 million in 2020, with higher earning asset volumes and lower borrowings volumes driving a $27.9 million increase in interest income, which was partially offset by a net $26.0 million negative impact associated with lower interest rates.
For 2019, Table 3 shows the higher amounts of loans and deposits outstanding drove a net increase of $14.3 million in net interest income, while the impact of higher deposit costs resulted in a $5.6 million decrease in total net interest income.
If our nonaccrual and restructured loans as of December 31, 2020, 2019 and 2018 had been current in accordance with their original terms and had been outstanding throughout the period (or since origination if held for part of the period), gross interest income in the amounts of approximately $3,038,000 $1,763,000, and $1,616,000, for nonaccrual loans and $645,000, $662,000, and $974,000, for restructured loans would have been recorded for 2020, 2019, and 2018, respectively. Interest income on such loans that was actually collected and included in net income in 2020, 2019 and 2018 amounted to approximately $652,000, $759,000, and $765,000, for nonaccrual
loans (prior to their being placed on nonaccrual status), and $483,000, $528,000, and $763,000, for restructured loans, respectively. At December 31, 2020 and 2019, there were no commitments to lend additional funds to debtors whose loans were nonperforming.
See additional information regarding net interest income in the section entitled “Interest Rate Risk.”
Provision for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered appropriate to absorb probable losses inherent in our loan portfolio. Management’s determination of the adequacy of the allowance is based on our level of loan growth, an evaluation of the loan portfolio, current economic conditions, historical loan loss experience and other risk factors.
For the years ended December 31, 2020, 2019, and 2018, we recorded a provision for loan losses of $35.0 million, $2.3 million, and a negative provision for loan losses of $3.6 million, respectively. The increase in 2020 was primarily related to estimated probable losses arising from the economic impact of COVID-19, as discussed below.
In March 2020, the COVID-19 pandemic began to impact our nation. The subsequent closures of, or restrictions on, many businesses and job losses continue to result in widespread negative economic impacts. The U.S. Government took various steps to lessen the negative impacts, including stimulus payments and the SBA's relief program. Under the SBA program, the SBA made six months of principal and interest payments on most of our SBA loans. SBA loans that were greater than 30 days delinquent were not eligible for these payments. This payment program was renewed by December 2020 legislation for an additional three months or eight months, depending on the industry, beginning in February 2021. Additionally, as previously discussed, we implemented a loan deferral program that began in late March 2020 in which borrowers could apply for a deferral of the loan payments for up to 90 days and after that 90 day period, borrowers could re-apply for an additional 90 days of payment deferrals. We are uncertain as to the extent that these programs have reduced probable loan losses, and due to that uncertainty and the temporary nature of the programs, we have not relied on these programs as significant positive factors in the risk grading of loans in our portfolio.
In determining the appropriate level of allowance for loan losses at December 31, 2020, we reviewed the industry types that we believed have significantly heightened risk as a result of the pandemic, which included, among others, hospitality, retail stores, and restaurants. Based on that analysis, we assigned elevated loan loss reserve percentages for those loan types that brought the total reserve percentages to a level consistent with what we believe are the probable loss rates incurred in a stressed economic scenario. The higher loss rates were generally determined based on our historical high one year loss rates for those loan types. As a result of the analysis, approximately $24.8 million of COVID-19 related qualitative reserves are included in the Company's December 31, 2020 allowance for loan loss amount of $52.3 million at December 31, 2020.
Additionally, as a result of elevated net-charge offs and nonaccrual loans in our SBA portfolio, we assigned higher allowance reserves to our SBA portfolio in 2020, which also impacted the provision for loan losses in 2020. See the sections "Nonperforming Assets" and "Allowance for Loan Losses" for additional discussion.
As noted above, beginning late in the first quarter of 2020, we offered a loan payment deferral program to borrowers negatively impacted by COVID-19. At June 30, 2020, we had a total of $774 million in loans that were in this deferral program. Most of these borrowers resumed payments in the second half of 2020, with total deferrals amounting to $186 million at September 30, 2020, while only $16.6 million remained in deferral status at December 31, 2020.
In 2019, our provision for loan losses was higher than previous years primarily due to higher net charge-offs. The negative provision for 2018 was due primarily to several large loan recoveries realized in the first quarter of 2018 totaling $3.7 million. Although our provision for loan losses was higher in 2019, it continued a trend in recent years until 2020 of being low compared to historical levels. The low levels of provision for loan losses recorded in those years were primarily the result of a sustained period of stable and generally improving loan quality trends, which resulted in lower amounts of provision needed to adjust our allowance for loan losses to the appropriate amount. This is driven by our allowance for loan loss model, which utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary. Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on. In recent years, the new periods being added into our model had generally lower levels of net charge-offs than the older periods rolling out of the model, and thus mostly offset provisions for loan losses that would normally be
required to reflect new loan growth and the net charge-offs experienced. Thus, the low level of net charge-offs (or net recoveries) experienced in recent years has been the primary reason for the low (or negative) provisions for loan losses recorded in among the years presented until 2020.
As shown in Table 14, total net charge-offs (recoveries) for the years ended December 31, 2020, 2019, and 2018, were $4.0 million, $1.9 million, and ($1.3 million), respectively. In 2020, the higher net charge-offs were driven by $3.2 million of net charge-offs in our SBA portfolio, and was concentrated in the "commercial, financial, and agricultural" category.
The higher net charge-offs in 2019 resulted from lower loan recoveries in comparison to 2018.
In 2018, we completed a loan sale of approximately $5.2 million in smaller balance nonperforming loans that resulted in loan charge-offs of $2.2 million. However, this was more than offset by full payoffs on four loans received in the first quarter of 2018 that resulted in recoveries to the allowance for loan losses of $3.3 million.
See “Nonperforming Assets” below for further discussion of our asset quality, which impacts our provisions for loan losses.
The allowance is monitored and analyzed regularly in conjunction with our loan analysis and grading program, and adjustments are made to maintain an adequate allowance for loan losses. See the section entitled “Allowance for Loan Losses and Loan Loss Experience” below for a more detailed discussion of the allowance for loan losses, including discussion of a change in the way that we expect to reserve for credit losses beginning in 2021 that may increase the levels and volatility of our provision for loan losses.
Noninterest Income
Our noninterest income amounted to $81.3 million in 2020, $59.5 million in 2019, and $58.9 million in 2018.
See Table 4 and the following discussion for an understanding of the components of noninterest income.
Management evaluates noninterest income on a non-GAAP basis that excludes items such as securities gains and losses and other miscellaneous gains and losses because management believes excluding those items results in a more meaningful reflection of noninterest income from recurring sources. We refer to this as "adjusted noninterest income" - see Table 4 for a reconciliation of reported noninterest income to "adjusted noninterest income." Adjusted noninterest income amounted to $73.4 million in 2020, a 23.1% increase from the $59.6 million recorded in 2019, The 2019 adjusted noninterest income of $59.6 million was a 2.4% increase from the $58.2 million recorded in 2018.
Service charges on deposit accounts amounted to $11.1 million, $13.0 million, and $12.7 million, in 2020, 2019, and 2018, respectively. The decrease in 2020 was primarily due to fewer instances of overdraft fees that we believe is likely associated with the generally higher levels of deposits maintained by our customers during 2020. We believe the increase in 2019 was primarily due to growth in our number of checking accounts, which we have been promoting with new product offerings.
Total "Other service charges, commissions and fees" amounted to $20.1 million in 2020, a 3.2% increase from the $19.5 million in 2019. The 2019 amount of $19.5 million was an 18.2% increase from the $16.5 million in 2018. This category of noninterest income includes items such as credit and debit card interchange income, ATM charges, safety deposit box rentals, fees from sales of personalized checks, and check cashing fees. The increases in this line item in 2019 and 2020 were primarily due to growth in credit and debit card interchange fees that we earn when our customers use their debit and credit cards issued by our bank. Net interchange income amounted to $14.1 million in 2020, $13.8 million in 2019 and $12.0 million in 2018. We believe the growth in card usage by our customers is due to customer payment preferences, as well as a result of ongoing promotion of these products. General growth of our bank also contributed to the increase in this line item in 2019 and 2020.
Fees from presold mortgages amounted to $14.2 million in 2020, $3.9 million in 2019, and $2.7 million in 2018. The increase in 2020 was primarily due to higher mortgage loan origination volume arising from historically low mortgage loan interest rates. The increase in 2019 was also due to increased volumes in the mortgage industry due to declining interest rates, as well as the hiring of additional loan originators.
Commissions from sales of insurance and financial products amounted to $8.8 million in 2020, $8.5 million in 2019, and $8.7 million in 2018. This line item includes commissions we receive from two primary sources - 1)
commissions from the sales of investment, annuity, and long term care insurance products, and 2) commissions from the sale of property and casualty insurance. The following table presents the contribution of each source to the total amount recognized in this line item:
($ in thousands) For the year ended December 31,
Commissions earned from: 2020 2019 2018
Sales of investments, annuities, and long term care insurance
$ 3,495 3,206 2,693
Sales of property and casualty insurance
5,353 5,289 6,038
Total
$ 8,848 8,495 8,731
As can be seen in the above table, sales of investments, annuities and long term care insurance increased in both 2019 and 2020, which was due to the increased growth and promotion of this line of business. Sales of property and casualty insurance also increased slightly in 2020 due to increased growth and promotion. The decline in this line item in 2019 was primarily due to lower contingent commissions compared to 2018, which can vary significantly and are impacted by the claims experience of the insurance carriers used by the Company.
We began offering SBA consulting services in 2016 with our May 2016 acquisition of SBA Complete. In this line of business, SBA Complete assists community banks throughout the nation with SBA origination and servicing activities. SBA consulting fees amounted to $8.6 million in 2020, $3.9 million in 2019, and $4.7 million in 2018. The increases in 2020 were due to fees earned by our SBA subsidiary, SBA Complete, related to assisting its third-party client banks with the PPP, which amounted to $4.6 million. SBA Complete also had $1.4 million in deferred revenue outstanding at December 31, 2020 that will be recorded as income upon the forgiveness portion of the PPP, which is expected to occur in the first half of 2021. The decline in these fees from 2018 to 2019 was associated with lower origination activity of our client banks.
Shortly after the acquisition of SBA Complete, we began a SBA Lending Division, which originates SBA loans throughout the nation and sells the SBA guaranteed portion of those loans, which results in loan sale gains. Loan sale volume can be volatile based on origination activity and the timing of the funding of loans in the pipeline. SBA loan sale gains amounted to $8.0 million, $8.3 million and $10.4 million in 2020, 2019, and 2018, respectively. Origination of SBA loans generally declined in 2020 due to the economic impact of COVID-19. The decline from 2018 to 2019 was due to the natural volatility discussed above, as well as lower loan sale premium percentages.
Table 4 shows earnings from bank-owned life insurance income were stable with $2.5 million in 2020, $2.6 million in 2019, and $2.5 million in 2018.
During 2020, we sold approximately $220 million in mortgage-backed and commercial mortgage-backed securities at a gain of $8.0 million. The securities sold were believed to be favorably impacted by historically low interest rates and Federal Reserve stimulus measures. Securities gains or losses were not significant in 2019 or 2018, with 2019 having a net gain of $0.1 million, and 2018 having no gains or losses.
“Other gains (losses), net” amounted to a net loss of $0.1 million for 2020, a net loss of $0.2 million for 2019, and a net gain of $0.7 million in 2018. This line item represents the net effects of miscellaneous gains and losses that are non-routine in nature. The net gain of $0.7 million in 2018 primarily related to a gain on the sale of a previously closed branch building.
Noninterest Expenses
Total noninterest expenses totaled $161.3 million, $157.2 million, and $156.5 million, for 2020, 2019 and 2018, respectively. Table 5 presents the components of our noninterest expense during the past three years.
Total personnel expense increased from $96.0 million in 2019 to $101.0 million in 2020, an increase of $5.0 million, or 5.2%. Within personnel expense, salaries expense increased $5.8 million, or 7.3%, while employee benefits expense decreased from $16.8 million to $16.0 million. Salaries expense increased primarily due to a $3.3 million increase in mortgage commission expense resulting from higher mortgage loan volume in 2020. Within employee benefits, health care expense, for which the Company is self-insured, is the single largest item and decreased in 2020 compared to 2019 due to lower claims activity.
In 2019, total personnel expense increased from $92.0 million in 2018 to $96.0 million in 2019, an increase of $4.0 million, or 4.4%. Within personnel expense, salaries expense increased $4.0 million, or 5.4%, while employee benefits expense was approximately the same in 2018 and 2019 at approximately $16.9 million. Salaries expense
increased primarily due to normal wage increases for our employees, as well as the hiring of several experienced bankers.
Net occupancy expenses amounted to $11.3 million in 2020, $11.1 million in 2019, and $10.8 million in 2018. The increase in 2020 and 2019 is primarily related to increased rent expense associated with several new leases executed during the years.
Equipment related expenses amounted to $4.3 million, $5.0 million, and $5.6 million, in 2020, 2019, and 2018, respectively. In 2018, we accelerated $0.3 million in depreciation expense associated with our ATM fleet in anticipation of replacing our ATM's in early 2019. This resulted in a decline in ATM depreciation expense in 2019, as well as lower associated repairs and maintenance costs. In 2020, the decrease in this line item related to lower machine maintenance and miscellaneous equipment purchases due to spend control efforts.
Merger and acquisition expenses amounted to $0.2 million in 2019 and $2.4 million in 2018. There were no merger and acquisition expenses in 2020. The 2018 amount was primarily comprised of severance costs and data processing conversion expenses related to the acquisition of Asheville Savings Bank.
Intangible amortization expense amounted to $4.0 million, $4.9 million, and $5.9 million in 2020, 2019 and 2018, respectively. In 2019 and 2020, intangible amortization expense declined due to the amortization schedules of those intangible assets generally declining over time.
Data processing expenses did not vary significantly among the periods presented, amounting to $3.2 million, $3.1 million, and $3.2 million in 2020, 2019, and 2018, respectively.
Marketing expense amounted to $2.0 million in 2020, $2.7 million in 2019, and $3.1 million in 2018. The decrease in 2020 was primarily due to lowering marketing activity as a result of the pandemic. The decrease from 2018 to 2019 was due to special promotional efforts in our new and expanded market area during 2018.
Non-credit losses remained relatively unchanged for the periods presented, amounting to $1.1 million in 2020, $1.0 million in 2019, and $1.0 million in 2018. These losses primarily related to debit card and credit card fraud losses.
Income Taxes
Table 6 presents the components of income tax expense and the related effective tax rates. We recorded income tax expense of $21.7 million in 2020, $24.2 million in 2019, and $24.2 million in 2018. Our effective tax rates were stable at 21.0% for 2020, 20.8% for 2019, and 21.3% for 2018.
We expect our effective tax rate to be approximately 21.0% in 2021.
Stock-Based Compensation
We recorded stock-based compensation expense of $2.5 million, $2.3 million, and $1.6 million, for the years ended December 31, 2020, 2019, and 2018, respectively. The increases in this expense have been due to retention-based restricted stock grants made to certain officers during the years presented. See Note 14 to the consolidated financial statements for more information regarding stock-based compensation.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Overview
At December 31, 2020, our total assets amounted to $7.3 billion, an 18.7% increase from 2019. The following table presents detailed information regarding the nature of changes in our loans and deposits in 2019 and 2020.
($ in thousands)
2020 Balance at
beginning of
period Internal
growth,
net Growth from Acquisitions Balance at
end of
period Total
percentage
growth
Loans outstanding
$ 4,453,466 263,216 14,633 4,731,315 6.2 %
Deposits - Noninterest-bearing
1,515,977 694,035 - 2,210,012 45.8 %
Deposits - Interest-bearing checking
912,784 259,238 - 1,172,022 28.4 %
Deposits - Money market
1,173,107 408,257 - 1,581,364 34.8 %
Deposits - Savings
424,415 94,851 - 519,266 22.3 %
Deposits - Brokered time
86,141 (65,919) - 20,222 -76.5 %
Deposits - Internet time
698 (449) - 249 -64.3 %
Deposits - Time >$100,000 - retail
563,108 (19,214) - 543,894 -3.4 %
Deposits - Time <$100,000 - retail
255,125 (28,558) - 226,567 -11.2 %
Total deposits
$ 4,931,355 1,342,241 - 6,273,596 27.2 %
Loans outstanding
$ 4,249,064 204,402 - 4,453,466 4.8 %
Deposits - Noninterest-bearing
1,320,131 195,846 - 1,515,977 14.8 %
Deposits - Interest-bearing checking
916,374 (3,590) - 912,784 -0.4 %
Deposits - Money market
1,035,523 137,584 - 1,173,107 13.3 %
Deposits - Savings
432,389 (7,974) - 424,415 -1.8 %
Deposits - Brokered time
239,875 (153,734) - 86,141 -64.1 %
Deposits - Internet time
3,428 (2,730) - 698 -79.6 %
Deposits - Time >$100,000 - retail
447,619 115,489 - 563,108 25.8 %
Deposits - Time <$100,000 - retail
264,000 (8,875) - 255,125 -3.4 %
Total deposits
$ 4,659,339 272,016 - 4,931,355 5.8 %
As shown in the table above, in 2020 and 2019, our total loans outstanding increased $277.8 million, or 6.2%, and $204.4 million, or 4.8%, respectively. Loan growth for 2020 was primarily driven by the origination of $244.9 million in PPP loans, of which $240.7 million was outstanding at December 31, 2020. We also assumed $14.6 million in loans with the acquisition of Magnolia Financial in 2020. Loan growth for 2019 was organic and primarily driven by our expansion in high-growth markets, hiring of experienced bankers, and increases in SBA lending. We generally intend to grow our loan portfolio. We have experienced lenders in our markets and attempt to provide high levels of service to achieve growth. The pandemic negatively impacted traditional (non-PPP) organic loan growth in 2020. Our ability to grow our loans outstanding in the future will be impacted by changes in the pandemic, as well as changes in PPP loan balances.
During 2020, we experienced strong growth in our deposit base, with total deposits increasing by $1.3 billion, or 27.2% from December 31, 2019. Deposit growth in our transaction accounts (checking, money market and savings), was especially strong, increasing $1.5 billion, or 29.5% from 2019. In addition to deposits arising from PPP loans, we believe this high deposit growth was due to a combination of stimulus funds, changes in customer behaviors during the pandemic, and a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services. The high deposit growth in 2020 allowed us to reduce our level of brokered deposits by $65.9 million, or 76.5% during the year. Additionally, we paid down our borrowings in 2020 by $239 million, or 79.4%, with the excess liquidity.
During 2019, we experienced an increase in total deposits of $272.0 million, or 5.8%. Within total deposits, we grew our retail deposits (non-brokered deposits) by $426 million, or 9.6%. Within our retail deposits, we experienced growth of $321.9 million, or 8.7%, in checking, money market and savings accounts, and had growth of $106.6 million, or 15.0%, in our retail time deposits. The high retail deposit growth in 2019 allowed us to reduce our level of
brokered deposits by $154 million, or 64.1% during the year. Additionally, we were able to pay down our borrowings in 2019 by $106 million.
Primarily as a result of our strong deposit growth, our liquidity levels have increased at December 31, 2020 compared to a year earlier. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings was 31.4% at December 31, 2020 compared to 21.4% at December 31, 2019.
Distribution of Assets and Liabilities
Table 7 sets forth the percentage relationships of significant components of our balance sheet at December 31, 2020, 2019, and 2018.
On the asset side, net loans to total assets decreased to 64% in 2020 compared to 72% for both 2019 and 2018, which was primarily due to the impact of the high deposit growth on total assets. The funds provided by the high deposit growth also resulted in increased security purchases in 2020 and resulted in total securities to total assets increasing from 14% in 2019 to 22% in 2020.
On the liability side, as a result of the high deposit growth, deposits increased to 86% of total liabilities and shareholders' equity in 2020, up from 80% and 79% in 2019 and 2018, respectively. In 2020 and 2019, we paid down our borrowings by $239 million and $106 million, respectively, which resulted in our borrowings decreasing to 1% and 5% of total liabilities and shareholders' equity for 2020 and 2019, respectively, compared to 7% for 2018.
Securities
Information regarding our securities portfolio as of December 31, 2020, 2019, and 2018 is presented in Tables 8 and 9.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. We obtain fair values for our investment securities from a third-party investment recordkeeper, who specializes in securities purchases and sales, recordkeeping, and valuation. This recordkeeper provides us with a third-party report that contains an evaluation of internal controls that includes testwork of securities valuation. We further test the values we receive by comparing the values for a significant sample of securities to another third-party valuation service on a quarterly basis.
Total securities amounted to $1.621 billion, $890 million, and $603 million, at December 31, 2020, 2019, and 2018, respectively. The increase in securities in 2020 and 2019 was primarily due to deploying excess cash balances into fixed rate securities that we initiated to realize higher yields.
The majority of our “government-sponsored enterprise” securities carry one maturity date, often with an issuer call feature. At December 31, 2020, of the $70.2 million in available for sale government-sponsored enterprise securities, $40.0 million were issued by the Federal Farm Credit Bank system, and the remaining $30.2 million were issued by the Federal Home Loan Bank system.
Nearly all of our $1.338 billion in available for sale mortgage-backed securities at December 31, 2020 were issued by Freddie Mac, Fannie Mae, Ginnie Mae, or the SBA, each of which is a government agency or government-sponsored corporation and guarantees the repayment of the securities. Included in this total are commercial mortgage-backed securities of $428.5 million. Mortgage-backed securities vary in their repayment in correlation with the underlying pools of mortgage loans.
Our investment policy permits us to hold up to 15% of our securities portfolio in corporate bonds. These bonds have the most credit risk of any of our securities. At December 31, 2020, our $45.2 million investment in corporate bonds was comprised of the following:
($ in thousands)
Issuer Issuer
Ratings Maturity Date Amortized Cost Fair Value
Bank of America
A2 (1) various $ 7,000 7,409
Citigroup (senior) A3 (1) 3/1/2023 5,011 5,288
Citigroup (subordinated) Baa2 (1) 7/30/2022 1,002 1,058
Goldman Sachs
A2 (1) 1/22/2023 5,037 5,319
JP Morgan Chase
A2 (1) 1/25/2023 5,009 5,294
Financial Institutions, Inc.
BBB- (2) 4/15/2030 4,000 3,956
Wells Fargo
A3 (1) 2/13/2023 3,084 3,261
Eagle Bancorp, Inc.
BBB (2) 9/1/2024 2,527 2,635
First Citizens BancShares Not Rated 3/15/2030 10,000 10,165
First Citizens BancShares Trust Preferred Security Not Rated 6/15/2034 1,000 835
Total investment in corporate bonds
$ 43,670 45,220
____________________________________________________________
(1)Ratings issued by Moody’s
(2)Rating issued by Kroll Bond Rating Agency.
We have concluded that any unrealized losses associated with our corporate bonds are due to interest rate considerations and not due to credit concerns.
At December 31, 2020, 2019, and 2018, net unrealized gains (losses) of $20.4 million, $9.7 million, and ($12.4 million), respectively, were included in the carrying value of securities classified as available for sale. Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates and the overall economic environment, not by concerns about the ability of the issuers to meet their obligations. Net unrealized gains and losses, net of applicable deferred income taxes, are included as part of a separate component of shareholders’ equity (accumulated other comprehensive income) as of December 31, 2020, 2019, and 2018, respectively.
At December 31, 2020, we held $167.6 million in securities classified as held to maturity, which are carried at amortized cost. These securities had fair values that exceeded their carrying values by $3.2 million at December 31, 2020. Approximately $30.0 million of the securities held to maturity are mortgage-backed securities that have been issued by either Freddie Mac or Fannie Mae. The remaining $137.6 million in securities held to maturity are comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation. We have no significant concentration of bond holdings from one government entity, with the single largest exposure to any one entity being $5.6 million. Management evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations.
The weighted average taxable-equivalent yield for the securities available for sale portfolio was 1.62% at December 31, 2020. The expected weighted average life of the available for sale portfolio using the call date for above-market callable bonds, the maturity date for all other non-mortgage-backed securities, and the expected life for mortgage-backed securities, was 5.7 years.
The weighted average taxable-equivalent yield for the securities held to maturity portfolio was 2.11% at December 31, 2020. The expected weighted average life of the held to maturity portfolio using the call date for above-market callable bonds, the expected life for mortgage-backed securities, and the maturity date for all other securities, was 7.9 years.
We expect the adoption of CECL to result in an insignificant amount of credit losses related to our securities portfolio.
The following table provides the names of issuers for which the Company has investment securities totaling in excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments as of December 31, 2020. All of these securities are issued by government sponsored corporations.
($ in thousands)
Issuer Amortized Cost Fair Value % of
Shareholders’
Equity
Fannie Mae $ 571,245 585,035 65.5 %
Freddie Mac 549,811 552,830 61.9 %
Ginnie Mae 234,780 237,159 26.5 %
Total $ 1,355,836 1,375,024
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 36 county market area, which are located in western, central and eastern North Carolina and three counties in northeastern South Carolina. 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.
In 2020, loans outstanding increased $277.8 million, or 6.2%, whereas in 2019, loans outstanding increased $204.4 million, or 4.8%. The growth in 2020 was primarily due to $240.9 million in PPP loans outstanding at December 31, 2020 (see discussion below) and $14.6 million in loans assumed from the acquisition of Magnolia Financial. The growth in 2019 was generated internally and was concentrated primarily within our higher growth markets.
The majority of our loan portfolio over the years has been real estate mortgage loans, with loans secured by real estate historically comprising approximately 87% to 89% of our outstanding loan balances. In 2020, our loans secured by real estate decreased to 82% of outstanding loan balances due to PPP loans, which are unsecured loans and are included in the line item "commercial, financial, and agricultural." Except for construction, land development and other land loans, the majority of our “real estate” loans are personal and commercial loans where cash flow from the borrower’s occupation or business is the primary repayment source, with the real estate pledged providing a secondary repayment source.
Table 10 provides a summary of the loan portfolio composition of our total loans at each of the past five year ends.
Commercial, financial, and agricultural loans increased from 9% at December 31, 2016 to 11% at December 31, 2019, due primarily to growth in loans made to municipalities and loans originated by our SBA Lending Division. This category of loans further increased in 2020 to 17% of total loans as of December 31, 2020 due primarily to the $241 million in PPP loans outstanding at year-end.
Residential real estate loans have declined from 28% of total loans at December 31, 2016 to 21% of total loans at December 31, 2020. This decline has been due to a combination of factors including consumers refinancing their home loans held by the Bank with long term fixed rate loans, which we typically sell in the secondary market. Additionally, the Carolina Bank loan portfolio acquired during 2017 had only an 11% mix of residential real estate loans.
Commercial real estate loans as a percentage of total loans has increased steadily over the past five years and amounted to 43% of all loans at December 31, 2020. Consistent with our community banking strategy, we have placed emphases on this type of loan growth and hired a number of experienced community bankers, who have originated a significant amount of business loans secured by real estate. Also, growth in our SBA loan portfolio has contributed to the increase in this category.
Table 11 provides a summary of scheduled loan maturities over certain time periods, with fixed rate loans and adjustable rate loans shown separately. Approximately 12% of our accruing loans outstanding at December 31, 2020 mature within one year and 51% of total loans mature within five years, with both of those measures being consistent with recent years. As of December 31, 2020, the percentages of variable rate loans and fixed rate loans as compared to total performing loans were 26% and 74%. In recent years, the mix of variable rate loans to fixed rate loans has been shifting to more fixed rate loans as fixed rate loans continue to be popular with many borrowers in order to lock in a low interest rate during the historically low interest rate environment that has been in effect. Also at December 31, 2020, we held $241 million in PPP loans, which all carry a fixed rate of interest. While fixed rate loans presents risk to our Company if interest rates rise, we measure our interest rate risk closely and, as
discussed in the section “Interest Rate Risk” below, we do not believe that an increase in interest rates would materially negatively impact our net interest income.
Paycheck Protection Program ("PPP") Loans
PPP loans, which we began originating in April 2020, are loans to qualified small businesses and other entities administered by the SBA under the provisions of the CARES Act and subsequent federal acts. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll and other eligible expenses. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required until the date on which the forgiveness amount relating to the loan is remitted to the lender and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking a PPP loan, the SBA paid lenders a processing fee tiered by the size of the loan (5% for loans of not more than $350 thousand; 3% for loans of more than $350 thousand and less than $2 million; and 1% for loans of at least $2 million).
PPP loans include loans to businesses and other entities that are reported as commercial loans originated under the guidelines discussed above. During 2020, we funded approximately $244.9 million of PPP loans and through December 31, 2020, we had received $4.0 million in forgiveness payments from the SBA. At December 31, 2020, we had $240.9 million in PPP loans outstanding, which represented 30.8% of our commercial, financial, and agricultural loans and 5.1% of our total loans. We expect that the majority of our outstanding PPP loans will be forgiven in 2021. Also, we are originating new PPP loans in 2021 as a result of legislation that provided additional funds for this relief program.
During 2020, we amortized net deferred PPP fees of $4.1 million as interest income. At December 31, 2020, we have $6.0 million in remaining deferred PPP origination fees that will be recognized over the lives of the loans, with accelerated amortization expected to result from the loan forgiveness process. We expect substantially all of these fees will be recognized in the first half of 2021 as a result of the loan forgiveness process.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, and foreclosed properties. As a matter of policy we place all loans that are past due 90 or more days on nonaccrual basis, and thus there were no loans at any of the past five year ends that were 90 days past due and still accruing interest.
Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because management has determined that the collection of interest is doubtful. Placing loans on nonaccrual status negatively impacts earnings because (i) interest accrued but unpaid as of the date a loan is placed on nonaccrual status is reversed and deducted from interest income, (ii) future accruals of interest income are not recognized until it becomes probable that both principal and interest will be paid and (iii) principal charged-off, if appropriate, may necessitate additional provisions for loan losses that are charged against earnings. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms.
Table 12 summarizes our nonperforming assets at the dates indicated.
In the past several years, we have generally benefited from improving economic conditions and successfully implemented a combination of strategies to reduce nonperforming assets. However, in 2020, a portion of our SBA loan portfolio was delinquent, and thus those loans did not qualify for the SBA's relief payment plan. Many of those loans defaulted for both pandemic and other reasons and were transferred to nonaccrual status. Due primarily to those SBA loans, our total nonperforming loans increased from $33.9 million at December 31, 2019 to $44.6 million at December 31, 2020. At December 31, 2020, we held $170 million in total SBA loans, of which $136 million were the unguaranteed portions of those loans.
Table 12a presents our nonperforming assets at December 31, 2020 by general geographic region.
The following is the composition, by loan type, of all of our nonaccrual loans at each period end:
($ in thousands) At December 31,
2020 At December 31,
Commercial, financial, and agricultural
$ 9,681 5,518
Real estate - construction, land development, and other land loans
643 1,067
Real estate - mortgage - residential (1-4 family) first mortgages
6,048 7,552
Real estate - mortgage - home equity loans/lines of credit
1,333 1,797
Real estate - mortgage - commercial and other
17,191 8,820
Installment loans to individuals
180 112
Total nonaccrual loans
$ 35,076 24,866
The nonaccrual table above generally indicates a net increase in nonaccrual loans during the year, with the “Commercial, financial and agricultural” and "Real estate - mortgage - commercial and other" categories experiencing the largest increases. Both of the increases were primarily driven by SBA loans that were placed on nonaccrual status during 2020. At December 31, 2020, we had $18.4 million in nonaccrual SBA loans compared to $9.0 million a year earlier. The unguaranteed portions of those loans amounted to $12.1 million at December 31, 2020 and $5.2 million at December 31, 2019. As of December 31, 2020, SBA loans accounted for approximately $9.3 million of our nonaccrual loans in the "Commercial, financial and agricultural” category and $9.1 million of our nonaccrual loans in the "Real estate - mortgage - commercial and other" category.
Due to government and the Company's COVID-19 relief programs, the nonperforming asset level at December 31, 2020 does not likely reflect the full impact of COVID-19. While there are still many uncertainties associated with the pandemic and the stimulus measures taken by the United States government to address it, higher unemployment levels and business closures would generally be expected to result in higher levels of nonperforming assets in the future.
As shown in Note 4 to the consolidated financial statements, our accruing past due loans (30 or more days) amounted to $22.3 million at December 31, 2020, a decrease of $1.4 million from the $23.7 million at December 31, 2019. Due to government and the Company's COVID-19 relief programs, the past due amounts at December 31, 2020 have not been negatively impacted by the pandemic in a significant manner. As previously discussed, since the onset of the pandemic in March 2020, we worked with many of our borrowers and provided loan payment deferrals, with the Company deferring payments on approximately $774 million loans at June 30, 2020. Over the second half of 2020, most of those borrowers resumed making payments and loans on deferral status declined to $16.6 million, or 0.4% of total loans at December 31, 2020.
Management routinely monitors the status of certain large loans that, in management’s opinion, have credit weaknesses that could cause them to become nonperforming loans. In addition to the nonperforming loan amounts discussed above and economic conditions that do not significantly worsen, management believes that an estimated $15 to $20 million of loans that were performing in accordance with their contractual terms at December 31, 2020 have the potential to develop problems in the near term depending upon the particular financial situations of the borrowers and economic conditions in general. Management has taken these potential problem loans into consideration when evaluating the adequacy of the allowance for loan losses at December 31, 2020 (see discussion below).
Loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that have not been disclosed in the problem loan amounts and the potential problem loan amounts discussed above do not represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity, or capital resources, or represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.
We provide additional information regarding the credit quality classification status of our loans in tables contained in Note 4 to our consolidated financial statements. Those tables indicate that at December 31, 2019 and December 31, 2020, our level of classified and nonaccrual loans to total loans amounted to approximately 1.3% and 1.4%, respectively. We believe that government relief programs have resulted in fewer loans migrating to classified risk grades than would otherwise been the case as a result of the pandemic. Instead, certain of those loans have been moved to Special Mention status, which resulted in that risk grade of loans increasing from $50.3 million at December 31, 2019 to $61.3 million at December 31, 2020.
Foreclosed properties includes primarily foreclosed real estate. Total foreclosed real estate amounted to $2.4 million, $3.9 million, and $7.4 million, at December 31, 2020, 2019, and 2018, respectively. Generally, we have experienced decreases in foreclosed real estate over the past several years primarily due to increased property sales activity and the improvement in our overall asset quality.
The following table presents the detail of our foreclosed real estate at each of the past two year ends:
$ in thousands At December 31, 2020 At December 31, 2019
Vacant land and farmland
$ 753 1,752
1-4 family residential properties
517 974
Commercial real estate
1,154 1,147
Total foreclosed real estate
$ 2,424 3,873
Allowance for Loan Losses and Loan Loss Experience
The allowance for loan losses is created by direct charges to operations (known as a “provision for loan losses” for the period in which the charge is taken). Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. Recoveries realized during the period are credited to this allowance. We consider our procedures for recording the amount of the allowance for loan losses and the related provision for loan losses to be a critical accounting policy. See the heading “Critical Accounting Policies” above for further discussion.
The factors that influence management’s judgment in determining the amount charged to operating expense include recent loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and current economic conditions.
We use a loan analysis and grading program to facilitate our evaluation of probable inherent loan losses and the adequacy of our allowance for loan losses. In this program, credit risk grades are assigned by management and tested by an internal loan review department and also an independent third-party consulting firm. The testing program includes an evaluation of a sample of new loans, loans we identify as having potential credit weaknesses, loans past due 90 days or more, loans originated by new loan officers, nonaccrual loans and any other loans identified during previous regulatory and other examinations.
We strive to maintain our loan portfolio in accordance with what management believes are conservative loan underwriting policies that result in loans specifically tailored to the needs of our market areas. Every effort is made to identify and minimize the credit risks associated with such lending strategies. We have no foreign loans, few agricultural loans and do not engage in significant lease financing or highly leveraged transactions. Commercial loans are diversified among a variety of industries. The majority of loans captioned in the tables discussed below as “real estate” loans are personal and commercial loans where real estate provides additional security for the loan. Collateral for the majority of these loans is located within our principal market area.
The total allowance for loan losses amounted to $52.4 million at December 31, 2020 compared to $21.4 million at December 31, 2019 and $21.0 million at December 31, 2018. Table 13 sets forth the allocation of the allowance for loan losses at the dates indicated. However, the allowance for loan losses is available to absorb losses in all categories.
Our allowance for loan losses is primarily based on mathematical model with the primary factors impacting this model being loan growth, net charge-off history, and asset quality trends, as well as specific reserves we set aside on certain individual loans exhibiting signs of deterioration. Our allowance for loan loss model utilizes the net charge-offs experienced in the most recent years as a significant component of estimating the current allowance for loan losses that is necessary. Thus, older years (and parts thereof) systematically age out and are excluded from the analysis as time goes on. In recent years, the new periods have had generally lower levels of net charge-offs (and net recoveries in some periods) than the older periods rolling out of the model, and thus mostly offset upward adjustments to the allowance that would normally be required to reflect new loan growth and the net charge-offs experienced. Thus, the low level of net charge-offs (or net recoveries) experienced in recent years had been the primary reason for the low (or negative) provisions for loan losses that have been necessary until 2020 to appropriately adjust the level or our allowance for loan losses.
In March 2020, the COVID-19 pandemic began to impact our nation. The subsequent closures of, or restrictions on, many businesses and job losses continue to result in widespread negative economic impacts. The U.S. Government has taken steps to lessen the negative impacts, including stimulus payments and the SBA's payment relief program. Under the SBA's payment relief program, the SBA made principal and interest payments on most of our SBA loans for six months in 2020. This program resumed in February 2021 with additional payments being made by the SBA for either three months or eight months, depending on the nature of the business. Additionally, as previously discussed, we implemented a loan deferral program. We are uncertain as to the extent that these programs have reduced probable loan losses, and due to that uncertainty and the temporary nature of the programs, we have not relied on these programs as significant positive factors in the risk grading of loans in our portfolio.
In determining the appropriate level of allowance for loan losses at December 31, 2020, we reviewed the industry types that we believed have significantly heightened risk as a result of the pandemic, which included, among others, hospitality, retail stores, and restaurants. At December 31, 2020, we held approximately $175 million in hotel loans and $82 million in restaurant loans, which we believe are the highest risk loans. Based on that analysis, we assigned elevated loan loss reserve percentages for certain of those loan types that brought the total reserve percentages to a level consistent with what we believe are the probable loss rates incurred in a stressed economic scenario. The higher loss rates were generally determined based on our historical high one year loss rates for those loan types. As a result of the analysis, approximately $24.8 million of COVID-19 related qualitative reserves are included in the Company's December 31, 2020 allowance for loan loss amount of $52.3 million.
Also, as discussed previously,our SBA loan portfolio accounted for a significant portion of our net-charge offs in 2020 and nonaccrual loans at December 31, 2020. Accordingly, our level of allowance for loans losses at December 31, 2020 reflects heightened reserves for our SBA loan portfolio compared to prior periods, primarily in the "Commercial, financial, and agricultural' and "Real estate - mortgage - commercial and other" categories, as reflected in Table 13.
For the years indicated, Table 14 summarizes our balances of loans outstanding, average loans outstanding, and a detailed rollforward of the allowance for loan losses.
Net loan charge-offs (recoveries) of total loans amounted to $4.0 million in 2020, $1.9 million in 2019, and ($1.3 million) in 2018. In 2020, we recorded $3.2 million of net charge-offs within our SBA loan portfolio, which was concentrated in the "commercial, financial, and agricultural" category. In 2019, the increases in the categories of "Commercial, financial, and agricultural" and "Real estate - mortgage - commercial and other" were driven by $2.1 million in net charge-offs within our SBA loan portfolio. In 2018, we received full payoffs on four loans that had been previously charged-down by approximately $3.3 million and are included in the table as recoveries, contributing significantly to the net recovery position for the year.
The ratio of our allowance to total loans was 1.11%, 0.48%, and 0.50%, at December 31, 2020, 2019, and 2018, respectively. As discussed above, the higher level of allowance for loan losses at December 31, 2020 was primarily driven by estimated probable losses arising from the economic impact of COVID-19. Our relatively low level of allowance to total loans in 2019 and 2018 was also significantly impacted by the acquisitions of Carolina Bank and Asheville Savings Bank, which had over $1 billion in total loans. Applicable accounting guidance did not allow us to record an allowance for loan losses upon the acquisition of loans - instead the acquired loans were recorded at their discounted fair value, which included the consideration of any expected losses. No allowance for loan losses is recorded for the acquired loans unless the expected credit losses exceed the remaining unamortized discounts - based on an individual basis for purchased credit impaired loans and on a pooled basis for performing acquired loans. See Critical Accounting Policies above for further discussion. Unaccreted discount on acquired loans, which is available to absorb loan losses on those acquired loans, amounted to $8.9 million, $12.7 million, and $17.3 million, at December 31, 2020, December 31, 2019, and December 31, 2018, respectively.
Management considers the allowance for loan losses adequate to cover probable loan losses on the loans outstanding as of each reporting date. It must be emphasized, however, that the determination of the allowance using our procedures and methods rests upon various judgments and assumptions about economic conditions and other factors affecting loans. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and losses on foreclosed real estate. Such agencies may require us to recognize additions to the allowance based on the examiners’ judgments about information available to them at the time of their examinations.
The way that we reserve for loan losses will experience a significant change in 2021, as a result of new guidance issued by the FASB. The Company was initially expecting to adopt this new guidance on January 1, 2020, but due to the COVID-19 pandemic and the related CARES Act and subsequent legislation, we elected to defer the implementation of CECL, and now expect to adopt it as of January 1, 2021. CECL requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit losses" and record an allowance that, when deducted from the amortized cost basis of the financial assets, presents the net amount expected to be collected on the financial assets. The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of our loan portfolio, as well as the prevailing economic conditions and forecasts. We will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, which we now expect to be January 1, 2021. At this time, we expect our allowance for credit losses will increase by approximately $12-14 million and that our reserve for unfunded commitments will increase by $6-$7 million.
The CECL standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. Providing for losses over the life of our loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred. This change may require us to increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses. It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.
Deposits
Deposits are a critical part of our business, as they provide the primary funding source for our loans and investments. Accordingly, as discussed below, we have implemented various strategies and developed competitive products to promote growth of our deposit balances.
At December 31, 2020, deposits outstanding amounted to $6.274 billion, an increase of 27.2%, or $1.342 billion, from the $4.931 billion at December 31, 2019, all of which was organic growth. Within our retail deposits (non-brokered), we experienced growth of $1.456 billion, or 29.5%, in checking, money market and savings accounts, and experienced a decline of $114 million, or 2.3%, in our retail time deposits. As a result of the strong retail deposit growth in 2020, we were able to reduce our level of brokered deposits during the year by $65.9 million, a decrease of 76.5%. In addition to deposits arising from PPP loans, our high deposit growth in 2020 is believed to be due to a combination of stimulus funds, changes in customer behaviors during the pandemic, a flight to quality to FDIC-insured banks, as well as our ongoing deposit growth initiatives.
During 2019, we experienced an increase in total deposits of $272.0 million, or 5.8%, which was substantially all retail deposit growth. Within our retail deposits, we experienced growth of $321.9 million, or 8.7%, in checking, money market and savings accounts, and had growth of $106.6 million, or 15.0%, in our retail time deposits.
We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.
The nature of our deposit growth is illustrated in the table on page 45. The following table reflects the mix of our deposits at each of the past three year ends:
2020 2019 2018
Noninterest-bearing checking accounts
35 % 31 % 28 %
Interest-bearing checking accounts
19 % 18 % 20 %
Money market deposits
25 % 24 % 22 %
Savings deposits
8 % 9 % 9 %
Time deposits - Brokered
- % 2 % 5 %
Time deposits > $100,000 - retail
9 % 11 % 10 %
Time deposits < $100,000 - retail
4 % 5 % 6 %
Total deposits 100 % 100 % 100 %
Our deposit mix continues a trend of being more heavily concentrated in transaction and non-time deposit accounts, with time deposits declining from 21% of total deposits at December 31, 2018, to 18% at December 31, 2019, to 13% at December 31, 2020. This is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits. Prior to the very low interest rate environment that we have been in for the past decade, the time deposit concentration was closer to 50%. We believe the lower mix of time deposits has been due to the relatively small gap between the interest rates that we pay on transaction accounts versus the rates we pay on time deposits.
Table 15 presents the average amounts of our deposits and the average yield paid for those deposits for the years ended December 31, 2020, 2019, and 2018.
As of December 31, 2020, we held approximately $564.4 million in time deposits of $100,000 or more, of which $375.7 million are in denominations of $250,000 or more. Table 16 is a maturity schedule of time deposits of $100,000 or more and time deposits of $250,000 or more as of December 31, 2020. This table shows that 88% of our time deposits greater than $100,000 and 90.0% of our time deposits greater than $250,000 mature within one year.
As of December 31, 2020, we held approximately $2.3 billion in uninsured deposits, including $283.0 million in time deposits.
At each of the past three year ends, we have no deposits issued through foreign offices, nor do we believe that we held any deposits by foreign depositors.
Borrowings
We typically utilize borrowings to provide balance sheet liquidity and to fund imbalances in our loan growth compared to our deposit growth. Our borrowings outstanding totaled $61.8 million at December 31, 2020, $300.7 million at December 31, 2019, and $406.6 million at December 31, 2018. Table 2 shows that average borrowings were $186.4 million in 2020, $332.6 million in 2019, and $406.9 million in 2018.
In both 2019 and 2020, we used a portion of the excess cash generated from deposit growth that exceeded loan growth to pay down borrowings of $106 million and $239 million, respectively.
At December 31, 2020, the Company had three sources of readily available borrowing capacity - 1) an approximately $1.02 billion line of credit with the FHLB, of which $8 million was outstanding at December 31, 2020 and $247 million was outstanding at December 31, 2019, 2) a $100 million federal funds line of credit with a correspondent bank, of which none was outstanding at December 31, 2020 or 2019, and 3) an approximately $134 million line of credit through the Federal Reserve Bank of Richmond’s (FRB) discount window, of which none was outstanding at December 31, 2020 or 2019.
Our line of credit with the FHLB can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by our FHLB stock and a blanket lien on most of our real estate loan portfolio. For the year ended December 31, 2020, the average amount of FHLB borrowings outstanding was approximately $132.4 million with a weighted average interest rate for the year of 1.13%. The maximum amount of short-term FHLB borrowings outstanding at any month-end during 2020 was $348.2 million. For the year ended December 31, 2019, the average amount of FHLB borrowings outstanding was approximately $278.4 million with a weighted average interest rate for the year of 2.22%. The maximum amount of short-term FHLB borrowings outstanding at any month-end during 2019 was $352.3 million.
Our correspondent bank relationship allows us to purchase up to $100 million in federal funds on an overnight, unsecured basis (federal funds purchased). We had no borrowings under this line at December 31, 2020 or 2019. There were no federal funds purchased outstanding at any month-end during 2020 or 2019.
We also have a line of credit with the FRB discount window. This line is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans). Based on the collateral that we owned as of December 31, 2020, the available line of credit was approximately $134 million. At December 31, 2020 and 2019, we had no borrowings outstanding under this line.
In addition to the lines of credit described above, we also have of $56.7 million of trust preferred security debt outstanding at December 31, 2020 and 2019. Each of our three issuances have 30 year final maturities and were structured in a manner that allows them to qualify as Tier 1 capital for regulatory capital adequacy requirements. We may call these debt securities at par on any quarterly interest payment, but do not expect to do so. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.70% for $20.6 million, three-month LIBOR plus 1.39% on $25.8 million, and LIBOR + 2.00% for $10.3 million that was assumed in the Carolina Bank acquisition.
Liquidity, Commitments, and Contingencies
Our liquidity is determined by our ability to convert assets to cash or to acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and our ability to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities which could also be sold to provide cash.
As noted above, in addition to internally generated liquidity sources, at December 31, 2020, we had the ability to obtain borrowings from the following three sources - 1) an approximately $1.02 billion line of credit with the FHLB, 2) a $100 million federal funds line with a correspondent bank, and 3) an approximately $134 million line of credit through the FRB’s discount window.
Our overall liquidity increased at December 31, 2020 compared to December 31, 2019 due to significant deposit growth that outpaced our loan growth. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings amounted to 31.4% at December 31, 2020 compared to 21.4% at December 31, 2019.
We continue to believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.
In the normal course of business we have various outstanding contractual obligations that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows.
Table 18 reflects our contractual obligations and other commercial commitments outstanding as of December 31, 2020. Any of our $8 million in outstanding borrowings with the FHLB may be accelerated immediately by the FHLB in certain circumstances, including material adverse changes in our condition or if our qualifying collateral is less than the amount required under the terms of the borrowing agreement.
In the normal course of business there are various outstanding commitments and contingent liabilities such as commitments to extend credit, which are not reflected in the financial statements. The following table presents a summary of our outstanding loan commitments as of December 31, 2020:
($ in millions)
Type of Commitment Fixed Rate Variable Rate Total
Loan commitments
$ 239 94 333
Unused lines of credit
188 900 1,088
Total
$ 427 994 1,421
At December 31, 2020 and 2019, we also had $14.1 million and $12.0 million, respectively, in standby letters of credit outstanding. We had no carrying amount for these standby letters of credit at either of those dates. The nature of the standby letters of credit is that of a stand-alone obligation made on behalf of our customers to suppliers of the
customers to guarantee payments owed to the supplier by the customer. The standby letters of credit are generally for terms of one year, at which time they may be renewed for another year if both parties agree. The payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by the customer to the supplier. The maximum potential amount of future payments (undiscounted) we could be required to make under the guarantees in the event of nonperformance by the parties to whom credit or financial guarantees have been extended is represented by the contractual amount of the financial instruments discussed above. In the event that we are required to honor a standby letter of credit, a note, already executed by the customer, becomes effective providing repayment terms and any collateral. Over the past two years, we have had to honor only a few standby letters of credit, none of which resulted in any loss to the Company. We expect any draws under existing commitments to be funded through normal operations.
It has been our experience that deposit withdrawals are generally able to be replaced with new deposits when needed. Based on that assumption, management believes that it can meet its contractual cash obligations and existing commitments from normal operations.
We are not involved in any legal proceedings that, in management’s opinion, are likely to have a material effect on the consolidated financial position of the Company.
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2020 amounted to $893.4 million compared to $852.4 million at December 31, 2019 and $764.2 million at December 31, 2018. The two basic components that typically have the largest impact on our shareholders’ equity are net income, which increases shareholders’ equity, and dividends declared, which decrease shareholders’ equity. Additionally, any stock issuances can significantly increase shareholders’ equity, including those associated with acquisitions, and any stock repurchases reduce shareholders’ equity.
In 2020, the most significant factors that impacted our equity were 1) the $81.5 million net income reported for 2020, which increased equity, 2) common stock dividends declared of $20.8 million, which reduced equity, 3) other comprehensive income of $9.2 million (primarily driven by increases in unrealized gains on available securities for sale), which increased equity, and 4) stock repurchases of $31.9 million, which decreased equity. See the Consolidated Statements of Shareholders’ Equity within the consolidated financial statements for disclosure of other less significant items affecting shareholders’ equity.
In 2019, the most significant factors that impacted our equity were 1) the $92.0 million net income reported for 2019, which increased equity, 2) common stock dividends declared of $16.0 million, which reduced equity, 3) other comprehensive income of $17.1 million (primarily driven by increases in unrealized gains on available securities for sale), which increased equity, 4) stock repurchases of $10.0 million, which decreased equity, and 5) the issuance of $3.1 million in stock related to the conclusion of an earn-out period related to a 2016 acquisition, which increased equity. See the Consolidated Statements of Shareholders’ Equity within the consolidated financial statements for disclosure of other less significant items affecting shareholders’ equity.
In 2018, the most significant factors that impacted our equity were 1) the $89.3 million net income reported for 2018, which increased equity, and 2) common stock dividends declared of $11.9 million, which reduced equity. See the Consolidated Statements of Shareholders’ Equity within the consolidated financial statements for disclosure of other less significant items affecting shareholders’ equity.
With the acquisition of Carolina Bank in March 2017, we assumed a deferred compensation plan for certain members of Carolina Bank’s board of directors that is fully funded by Company stock, which was valued at $7.7 million on the date of acquisition. Subsequent to the acquisition in 2017, approximately $5.5 million of the deferred compensation has been paid to the plan participants. The balances of the related asset and liability were each $2.2 million at December 31, 2020, both of which are presented as components of shareholders’ equity.
As discussed in “Borrowings” above, we also currently have $56.7 million in trust preferred securities outstanding, all of which qualify as Tier I capital under both current and forthcoming regulatory standards.
We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.
The Company and the Bank must comply with regulatory capital requirements established by the Federal Reserve and the Commissioner. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
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, 2020, approximately $590,672,000 of the Company’s investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
Table 20 presents our regulatory capital ratios as of December 31, 2020, 2019, and 2018. All of our capital ratios have significantly exceeded the minimum regulatory thresholds for all periods covered by this report.
In this economic environment, our goal is to maintain our capital ratios at levels at least 200 basis points higher than the “well capitalized” thresholds set for banks. At December 31, 2020, our tier 1 leverage ratio was 9.88% compared to the regulatory well capitalized bank-level threshold of 5.00% and our total risk-based capital ratio was 15.37% compared to the 10.50% regulatory well capitalized threshold.
In addition to regulatory capital ratios, we also closely monitor our ratio of tangible common equity to tangible assets (“TCE Ratio”). Our TCE Ratio was 9.08% at December 31, 2020 compared to 10.20% at December 31, 2019, with the decline in 2020 being due to the high asset growth that was a result of high deposit growth.
See “Supervision and Regulation” under “Business” above and Note 15 to the consolidated financial statements for discussion of other matters that may affect our capital resources.
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities.
Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics. We have not engaged in significant derivatives activities through December 31, 2020 and have no current plans to do so.
Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk - Item 7A.)
Net interest income is our most significant component of earnings. Notwithstanding changes in volumes of loans and deposits, our level of net interest income is continually at risk due to the effect that changes in general market interest rate trends have on interest yields earned and paid with respect to our various categories of earning assets and interest-bearing liabilities. It is our policy to maintain portfolios of earning assets and interest-bearing liabilities with maturities and repricing opportunities that will afford protection, to the extent practical, against wide interest rate fluctuations. Our exposure to interest rate risk is analyzed on a regular basis by management using standard GAP reports, maturity reports, and an asset/liability software model that simulates future levels of interest income and expense based on current interest rates, expected future interest rates, and various intervals of “shock” interest rates. Over the years, we have been able to maintain a fairly consistent yield on average earning assets (net interest margin), even during periods of changing interest rates. Over the past five calendar years, our net interest margin has ranged from a low of 3.56% (realized in 2020) to a high of 4.09% (realized in 2018). The consistency of the net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At December 31, 2020, approximately 68% of our interest-earning assets are subject to repricing within five years (because they are either adjustable rate assets or they are fixed rate assets that mature) and substantially all of our interest-bearing liabilities reprice within five years.
Table 17 sets forth our interest rate sensitivity analysis as of December 31, 2020, using stated maturities for all fixed rate instruments except mortgage-backed securities (which are allocated in the periods of their expected payback) and securities and borrowings with call features that are expected to be called (which are shown in the period of their expected call). As illustrated by Table 17, at December 31, 2020, we had $2.0 billion more in interest-bearing liabilities that are subject to interest rate changes within one year than earning assets. This generally would indicate that net interest income would experience downward pressure in a rising interest rate environment and would benefit from a declining interest rate environment. However, this method of analyzing interest sensitivity only
measures the magnitude of the timing differences and does not address earnings, market value, or management actions. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. In addition to the effects of “when” various rate-sensitive products reprice, market rate changes may not result in uniform changes in rates among all products. For example, included in interest-bearing liabilities subject to interest rate changes within one year at December 31, 2020 were deposits totaling $3.3 billion comprised of checking, savings, and certain types of money market deposits with interest rates set by management. These types of deposits historically have not repriced with, or in the same proportion, as general market indicators.
Overall, we believe that in the near term (twelve months), net interest income will not likely experience significant downward pressure from rising interest rates. Similarly, we would not expect a significant increase in near term net interest income from falling interest rates. Generally, when rates change, our interest-sensitive assets that are subject to adjustment reprice immediately at the full amount of the change, while our interest-sensitive liabilities that are subject to adjustment reprice at a lag to the rate change and typically not to the full extent of the rate change. In the short-term (less than twelve months), this generally results in us being asset-sensitive, meaning that our net interest income benefits from an increase in interest rates and is negatively impacted by a decrease in interest rates, which is what we experienced following the March 2020 interest rate cuts. However, in the twelve-month and longer horizon, the impact of having a higher level of interest-sensitive liabilities generally lessens the short-term effects of changes in interest rates.
The general discussion in the foregoing paragraph applies most directly in a “normal” interest rate environment in which longer-term maturity instruments carry higher interest rates than short-term maturity instruments, and is less applicable in periods in which there is a “flat” interest rate curve. A “flat yield curve” means that short-term interest rates are substantially the same as long-term interest rates. Due to actions taken by the Federal Reserve related to short-term interest rates and the impact of the global economy on longer-term interest rates, we are currently in a very low and flat interest rate curve environment. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Bank, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge, the profit spread we realize between loan yields and deposit rates narrows, which pressures our net interest margin. While there have been periods in the last few years that the yield curve has steepened slightly, it currently remains very flat. This flat yield curve and the intense competition for high-quality loans in our market areas have resulted in lower interest rates on loans.
In an effort to address concerns about the national and global economy the Federal Reserve cut interest rates by 75 basis points in the second half of 2019. And in March 2020, the Federal Reserve cut interest rates by an additional 150 basis points in response to the COVID-19 pandemic. Our interest-bearing cash balances and most of our variable rate loans, generally reset to lower rates soon after these interest rate cuts. We reduced our offering rates on most deposit products in March 2020 and our borrowing costs were also reduced by lower rates and repaying a significant portion of our outstanding borrowings. Overall however, the impact of the interest rate cuts negatively impacted our net interest margin and our earnings in 2020.
Assuming no significant changes in interest rates in the next twelve months, we expect continued pressure on our net interest margin (excluding the impact of PPP - see below) as a result of the flat yield curve and the expectation of lower interest rates on the redeployment of cash received on maturing loans and investments that will likely not be fully offset by lower funding costs. In addition, further stimulus payments made by the government may result in additional low yielding liquidity that would likely result in incremental interest income, but negatively impact the net interest margin.
In April and early May 2020, we approved approximately $245 million in PPP loans. These loans all have an interest rate of 1.00%. In addition to the interest rate, the SBA compensated us with an origination fee for each loan of between 1% to 5% of the loan amount, depending on the size of each loan. We received approximately $10.6 million in these fees related to these loans, which were netted against the cost to originate each loan of approximately $0.6 million and are initially being amortized over the two year maturities of the loans using the effective interest method of recognition. Early repayments, including the loan forgiveness provisions contained in the PPP, will result in accelerated amortization. In 2020, we amortized $4.1 million of the PPP loan fees. Remaining deferred fees at December 31, 2020 amounted to $6.0 million, which we expect to substantially realize . in the first half of 2021, thus favorably impacting our net interest margin.
As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain purchase accounting adjustments related to the acquired banks. The purchase accounting adjustments related to the premium amortization on loans, deposits and borrowings are based on amortization schedules and are thus systematic and predictable. The accretion of the loan discount on acquired loans amounted to $3.8 million, $4.6 million, and $7.0 million in 2020, 2019, and 2018, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that are initially recorded and the fact that the accretion being recorded is dependent on both the credit quality of the acquired loans and the impact of any accelerated loan repayments, including payoffs. If the credit quality of the loans declines, some, or all, of the remaining discount will cease to be accreted into income. If the underlying loans experience accelerated paydowns or improved performance expectations, the remaining discount will be accreted into income on an accelerated basis. In the event of total payoff, the remaining discount will be entirely accreted into income in the period of the payoff. Each of these factors is difficult to predict and susceptible to volatility. The remaining loan discount on acquired loans amounted to $8.9 million at December 31, 2020 compared to $12.7 million at December 31, 2019.
We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency positions. Table 19 presents the expected maturities of our other than trading market risk sensitive financial instruments. Table 19 also presents the estimated fair values of market risk sensitive instruments as estimated in accordance with relevant accounting guidance. Our assets and liabilities have estimated fair values that do not materially differ from their carrying amounts.
See additional discussion regarding net interest income, as well as discussion of the changes in the annual net interest margin, in the section entitled “Net Interest Income” above.
Inflation
Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plant and inventories. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans and deposits. Also, general increases in the price of goods and services will result in increased operating expenses.
Current Accounting Matters
We prepare our consolidated financial statements and related disclosures in conformity with standards established by, among others, the FASB. Because the information needed by users of financial reports is dynamic, the FASB frequently issues new rules and proposes new rules for companies to apply in reporting their activities. See Note 1 to our consolidated financial statements for a discussion of recent rule proposals and changes.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information responsive to this Item is found in Item 7 under the caption “Interest Rate Risk.”
Table 1 Selected Consolidated Financial Data
($ in thousands, except per share and nonfinancial data) Year Ended December 31,
2020 2019 2018 2017 2016
Income Statement Data
Interest income $ 237,684 250,107 231,207 177,382 130,987
Interest expense 19,562 33,903 23,777 12,671 7,607
Net interest income 218,122 216,204 207,430 164,711 123,380
Provision (reversal) for loan losses 35,039 2,263 (3,589) 723 (23)
Net interest income after provision 183,083 213,941 211,019 163,988 123,403
Noninterest income 81,346 59,529 58,942 49,232 26,176
Noninterest expense 161,298 157,194 156,483 145,481 107,446
Income before income taxes 103,131 116,276 113,478 67,739 42,133
Income taxes 21,654 24,230 24,189 21,767 14,624
Net income 81,477 92,046 89,289 45,972 27,509
Preferred stock dividends - - - - (175)
Net income available to common shareholders 81,477 92,046 89,289 45,972 27,334
Earnings per common share - basic 2.81 3.10 3.02 1.82 1.37
Earnings per common share - diluted 2.81 3.10 3.01 1.82 1.33
Per Share Data (Common)
Cash dividends declared - common $ 0.72 0.54 0.40 0.32 0.32
Market Price
High 40.00 41.34 43.14 41.76 28.49
Low 17.32 31.22 30.50 26.47 17.15
Close 33.83 39.91 32.66 35.31 27.14
Stated book value - common 31.26 28.80 25.71 23.38 17.66
Selected Balance Sheet Data (at year end)
Total assets $ 7,289,751 6,143,639 5,864,116 5,547,037 3,614,862
Loans 4,731,315 4,453,466 4,249,064 4,042,369 2,710,712
Allowance for loan losses 52,388 21,398 21,039 23,298 23,781
Intangible assets 254,638 251,585 255,480 257,507 79,475
Deposits 6,273,596 4,931,355 4,659,339 4,406,955 2,947,353
Borrowings 61,829 300,671 406,609 407,543 271,394
Total shareholders’ equity 893,421 852,401 764,230 692,979 368,101
Selected Average Balances
Assets $ 6,765,998 6,027,047 5,693,760 4,590,786 3,422,267
Loans 4,702,743 4,346,331 4,161,838 3,420,939 2,603,327
Earning assets 6,160,100 5,448,400 5,112,436 4,101,949 3,108,918
Deposits 5,644,290 4,824,216 4,516,811 3,696,730 2,827,513
Interest-bearing liabilities 3,897,912 3,720,536 3,663,077 3,025,401 2,324,823
Shareholders’ equity 874,532 812,823 727,920 533,205 360,715
Ratios
Return on average assets 1.20 % 1.53 % 1.57 % 1.00 % 0.80 %
Return on average common equity 9.32 % 11.32 % 12.27 % 8.62 % 7.73 %
Net interest margin (taxable-equivalent basis) 3.56 % 4.00 % 4.09 % 4.08 % 4.03 %
Loans to deposits at year end 75.42 % 90.31 % 91.19 % 91.73 % 91.97 %
Allowance for loan losses to total loans 1.11 % 0.48 % 0.50 % 0.58 % 0.88 %
Nonperforming assets to total assets at year end 0.64 % 0.62 % 0.74 % 0.96 % 1.64 %
Net charge-offs (recoveries) to average total loans 0.09 % 0.04 % (0.03 %) 0.04 % 0.14 %
Nonfinancial Data - number of branches 101 101 101 104 88
Nonfinancial Data - number of employees (FTEs) 1,095 1,088 1,076 1,140 834
Note - During 2017, the Company completed two significant whole-bank acquisitions. See additional discussion in "Mergers and Acquisitions" in Item 1.
Table 2 Average Balances and Net Interest Income Analysis
Year Ended December 31,
2020 2019 2018
($ in thousands) Average
Volume Avg.
Rate Interest
Earned
or Paid Average
Volume Avg.
Rate Interest
Earned
or Paid Average
Volume Avg.
Rate Interest
Earned
or Paid
Assets
Loans (1) (2)
$ 4,702,743 4.53 % $ 213,099 $ 4,346,331 5.08 % $ 220,784 $ 4,161,838 5.01 % $ 208,609
Taxable securities
967,900 2.11 % 20,429 719,435 2.76 % 19,881 419,356 2.54 % 10,638
Non-taxable securities
34,108 2.13 % 725 32,200 3.13 % 1,007 50,945 2.91 % 1,482
Other interest-earning assets, primarily overnight funds
455,349 0.75 % 3,431 350,434 2.41 % 8,435 480,297 2.18 % 10,478
Total interest-earning assets
6,160,100 3.86 % 237,684 5,448,400 4.59 % 250,107 5,112,436 4.52 % 231,207
Cash and due from banks
81,154 55,422 80,053
Premises and equipment
116,425 117,465 115,573
Other assets
408,319 405,760 385,698
Total assets
$ 6,765,998 $ 6,027,047 $ 5,693,760
Liabilities and Equity
Interest-bearing checking accounts
$ 1,019,773 0.12 % $ 1,208 $ 891,766 0.15 % $ 1,358 $ 875,751 0.10 % $ 887
Money market accounts
1,367,851 0.34 % 4,632 1,111,599 0.63 % 6,992 1,023,162 0.32 % 3,265
Savings accounts
467,682 0.15 % 711 419,450 0.29 % 1,201 439,880 0.21 % 922
Time deposits >$100,000
616,171 1.33 % 8,215 704,332 1.93 % 13,598 641,516 1.30 % 8,356
Other time deposits
239,990 0.64 % 1,535 260,741 0.73 % 1,901 275,904 0.38 % 1,061
Total interest-bearing deposits
3,711,467 0.44 % 16,301 3,387,888 0.74 % 25,050 3,256,213 0.45 % 14,491
Short-term borrowings 71,955 1.42 % 1,022 209,613 2.54 % 5,324 222,891 2.11 % 4,703
Long-term borrowings 114,490 1.96 % 2,239 123,035 2.86 % 3,529 183,973 2.49 % 4,583
Total interest-bearing liabilities
3,897,912 0.50 % 19,562 3,720,536 0.91 % 33,903 3,663,077 0.65 % 23,777
Noninterest-bearing checking accounts
1,932,823 1,436,329 1,260,598
Total sources of funds
5,830,735 0.34 % 5,156,865 0.66 % 4,923,675 0.48 %
Other liabilities
60,731 57,359 42,165
Shareholders’ equity
874,532 812,823 727,920
Total liabilities and shareholders’ equity
$ 6,765,998 $ 6,027,047 $ 5,693,760
Net yield on interest-earning assets and net interest income
3.54 % $ 218,122 3.97 % $ 216,204 4.06 % $ 207,430
Net yield on interest-earning assets and net interest income - tax-equivalent (3)
3.56 % $ 219,590 4.00 % $ 217,845 4.09 % $ 209,024
Interest rate spread
3.36 % 3.68 % 3.87 %
Average prime rate
3.54 % 5.28 % 4.91 %
(1)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 $4,755, $1,264, and $1,905 for 2020, 2019, and 2018, respectively.
(2)Includes accretion of discount on acquired and SBA loans of $6,328, $5,974, and $7,812 in 2020, 2019, and 2018, respectively.
(3)Includes tax-equivalent adjustments of $1,468, $1,641, and $1,594 in 2020, 2019, and 2018, respectively, to reflect the federal and state tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.
Table 3 Volume and Rate Variance Analysis
Year Ended December 31, 2020 Year Ended December 31, 2019
Change Attributable to Change Attributable to
($ in thousands) Changes
in Volumes Changes
in Rates Total
Increase
(Decrease) Changes
in Volumes Changes
in Rates Total
Increase
(Decrease)
Interest income:
Loans $ 17,128 (24,813) (7,685) 9,310 2,865 12,175
Taxable securities 6,055 (5,507) 548 7,952 1,291 9,243
Non-taxable securities 50 (332) (282) (566) 91 (475)
Short-term investments, primarily overnight funds 1,658 (6,662) (5,004) (2,979) 936 (2,043)
Total interest income 24,891 (37,314) (12,423) 13,717 5,183 18,900
Interest expense:
Interest bearing checking accounts 173 (323) (150) 20 451 471
Money market accounts 1,240 (3,600) (2,360) 419 3,310 3,729
Savings accounts 106 (596) (490) (51) 330 279
Time deposits >$100,000 (1,439) (3,944) (5,383) 1,016 4,229 5,245
Other time deposits (142) (224) (366) (84) 919 835
Total interest-bearing deposits (62) (8,687) (8,749) 1,320 9,239 10,559
Short-term borrowings (2,726) (1,577) (4,303) (309) 930 621
Long-term borrowings (213) (1,076) (1,289) (1,626) 572 (1,054)
Total interest expense (3,001) (11,340) (14,341) (615) 10,741 10,126
Net interest income $ 27,892 (25,974) 1,918 14,332 (5,558) 8,774
Changes attributable to both volume and rate are allocated equally between rate and volume variances.
Table 4 Noninterest Income
Year Ended December 31,
($ in thousands) 2020 2019 2018
Service charges on deposit accounts
$ 11,098 12,970 12,690
Other service charges, commissions and fees - interchange income, net of interchange expense 14,142 13,814 11,995
Other service charges, commissions, and fees - other 5,955 5,667 4,493
Fees from presold mortgage loans
14,183 3,944 2,735
Commissions from sales of insurance and financial products
8,848 8,495 8,731
SBA consulting fees
8,644 3,872 4,675
SBA loan sale gains
7,973 8,275 10,366
Bank-owned life insurance income
2,533 2,564 2,534
Securities gains (losses), net
8,024 97 -
Other gains (losses), net
(54) (169) 723
Noninterest income
$ 81,346 59,529 58,942
Non-GAAP adjustments - Exclude:
Securities (gains) losses, net
(8,024) (97) -
Other (gains) losses, net
54 169 (723)
Adjusted noninterest income $ 73,376 59,601 58,219
Table 5 Noninterest Expenses
Year Ended December 31,
($ in thousands) 2020 2019 2018
Salaries $ 84,941 79,129 75,077
Employee benefits 16,027 16,844 16,888
Total personnel expense 100,968 95,973 91,965
Occupancy expense 11,278 11,122 10,793
Equipment related expenses 4,285 5,023 5,627
Merger and acquisition expenses - 192 2,358
Amortization of intangible assets 3,956 4,858 5,917
Dues and subscriptions expense (includes software licenses) 4,764 4,250 3,431
Data processing expense 3,157 3,130 3,234
Telephone and data lines 2,893 3,057 3,024
Marketing expense 1,960 2,727 3,065
Non-credit losses 1,024 974 960
Foreclosed property losses, net 547 939 565
Other operating expenses 26,466 24,949 25,544
Total $ 161,298 157,194 156,483
Table 6 Income Taxes
($ in thousands) 2020 2019 2018
Current - Federal $ 27,799 19,920 19,188
- State 3,909 2,499 3,187
Deferred - Federal (8,893) 1,572 1,658
- State (1,161) 239 156
Total tax expense $ 21,654 24,230 24,189
Effective tax rate 21.0 % 20.8 % 21.3 %
Table 7 Distribution of Assets and Liabilities
As of December 31,
2020 2019 2018
Assets
Interest-earning assets
Net loans
64 % 72 % 72 %
Securities available for sale
20 13 9
Securities held to maturity
2 1 2
Short-term investments
4 3 7
Total interest-earning assets
90 89 90
Noninterest-earning assets
Cash and due from banks
1 1 1
Premises and equipment
2 2 2
Intangible assets
3 4 4
Foreclosed real estate
- - -
Bank-owned life insurance
1 2 2
Other assets
3 2 1
Total assets
100 % 100 % 100 %
Liabilities and shareholders’ equity
Noninterest-bearing checking accounts 30 % 25 % 22 %
Interest-bearing checking accounts 16 15 16
Money market accounts 22 19 18
Savings accounts 7 7 7
Time deposits of $100,000 or more 8 10 12
Other time deposits 3 4 4
Total deposits 86 80 79
Borrowings 1 5 7
Accrued expenses and other liabilities 1 1 1
Total liabilities 88 86 87
Shareholders’ equity 12 14 13
Total liabilities and shareholders’ equity
100 % 100 % 100 %
Table 8 Securities Portfolio Composition
As of December 31,
($ in thousands) 2020 2019 2018
Securities available for sale:
Government-sponsored enterprise securities
$ 70,206 20,009 82,662
Mortgage-backed securities
1,337,706 767,285 385,551
Corporate bonds
45,220 34,651 33,138
Total securities available for sale
1,453,132 821,945 501,351
Securities held to maturity:
Mortgage-backed securities
29,959 41,423 52,048
State and local governments
137,592 26,509 49,189
Total securities held to maturity
167,551 67,932 101,237
Total securities
$ 1,620,683 889,877 602,588
Average total securities during year
$ 1,002,008 751,635 470,301
Table 9 Securities Portfolio Maturity Schedule
As of December 31,
($ in thousands) Book
Value Fair
Value Book
Yield (1)
Securities available for sale:
Government-sponsored enterprise securities
Due after five but within ten years
$ 60,016 60,280 1.14 %
Due after ten years
10,000 9,926 1.24 %
Total
70,016 70,206 1.15 %
Mortgage-backed securities (2)
Due within one year
12,423 12,593 0.72 %
Due after one but within five years
637,867 654,200 1.75 %
Due after five but within ten years
498,645 500,402 1.43 %
Due after ten years
170,063 170,511 1.46 %
Total
1,318,998 1,337,706 1.58 %
Corporate debt securities
Due after one but within five years
28,670 30,265 3.46 %
Due after five but within ten years
14,000 14,120 4.12 %
Due after ten years
1,000 835 2.47 %
Total
43,670 45,220 3.65 %
Total securities available for sale
Due within one year
12,423 12,593 0.72 %
Due after one but within five years
666,537 684,465 1.82 %
Due after five but within ten years
572,661 574,802 1.47 %
Due after ten years
181,063 181,272 1.45 %
Total
$ 1,432,684 $ 1,453,132 1.62 %
Securities held to maturity:
Mortgage-backed securities (2)
Due after one but within five years
$ 29,959 30,900 1.82 %
Total
29,959 30,900 1.82 %
State and local governments
Due within one year
2,087 2,101 3.75 %
Due after one but within five years
2,915 3,008 4.59 %
Due after five but within ten years
3,418 3,536 2.70 %
Due after ten years
129,172 131,189 2.08 %
Total securities held to maturity
137,592 139,834 2.17 %
Total securities held to maturity
Due within one year
2,087 2,101 3.75 %
Due after one but within five years
32,874 33,908 2.07 %
Due after five but within ten years
3,418 3,536 2.70 %
Due after ten years
129,172 131,189 2.08 %
Total
$ 167,551 170,734 2.11 %
________________________________________
(1)Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 22.98% tax rate.
(2)Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.
Table 10 Loan Portfolio Composition
As of December 31,
2020 2019 2018 2017 2016
($ in thousands) Amount % of
Total
Loans Amount % of
Total
Loans Amount % of
Total
Loans Amount % of
Total
Loans Amount % of
Total
Loans
Commercial, financial, and agricultural
$ 782,549 17 % $ 504,271 11 % $ 457,037 11 % $ 381,130 10 % $ 261,813 9 %
Real estate - construction, land development & other land loans
570,672 12 % 530,866 12 % 518,976 12 % 539,020 13 % 354,667 13 %
Real estate - mortgage - residential (1-4 family) first mortgages
972,378 21 % 1,105,014 25 % 1,054,176 25 % 972,772 24 % 750,679 28 %
Real estate - mortgage - home equity loans / lines of credit
306,256 6 % 337,922 8 % 359,162 8 % 379,978 9 % 239,105 9 %
Real estate - mortgage - commercial and other
2,049,203 43 % 1,917,280 43 % 1,787,022 42 % 1,696,107 42 % 1,049,460 39 %
Consumer loans 53,955 1 % 56,172 1 % 71,392 2 % 74,348 2 % 55,037 2 %
Loans, gross 4,735,013 100 % 4,451,525 100 % 4,247,765 100 % 4,043,355 100 % 2,710,761 100 %
Unamortized net deferred loan costs (fees)
(3,698) 1,941 1,299 (986) (49)
Total loans $ 4,731,315 4,453,466 4,249,064 4,042,369 2,710,712
Table 11 Loan Maturities
As of December 31, 2020
Due within
one year Due after one year but
within five years Due after five years but
within fifteen years Due after fifteen
years Total
($ in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Variable Rate Loans:
Commercial, financial, and agricultural $ 66,551 7.31 % $ 45,998 5.32 % $ 48,787 5.68 % $ 562 5.02 % $ 161,898 6.25 %
Real estate - construction, land development & other land loans 80,705 4.68 % 53,802 4.05 % 1,750 4.39 % 10,959 5.25 % 147,216 4.49 %
Real estate - mortgage - residential (1-4 family) first mortgages 10,597 4.88 % 15,798 5.12 % 28,339 4.44 % 153,380 3.71 % 208,114 3.92 %
Real estate - mortgage - home equity loans / lines of credit 13,134 3.97 % 57,034 4.02 % 211,972 3.61 % 317 3.86 % 282,457 3.70 %
Real estate - mortgage - commercial and other 59,494 3.39 % 165,134 3.42 % 63,535 3.52 % 98,466 4.76 % 386,629 3.77 %
Consumer loans 2,898 4.01 % 20,029 8.66 % 65 12.54 % 1,694 5.64 % 24,686 7.90 %
Total at variable rates 233,379 5.06 % 357,795 4.22 % 354,448 3.95 % 265,378 4.18 % 1,211,000 4.28 %
Fixed Rate Loans:
Commercial, financial, and agricultural $ 29,840 3.11 % $ 389,178 2.28 % $ 106,870 3.38 % $ 81,385 2.83 % $ 607,273 2.59 %
Real estate - construction, land development & other land loans 112,719 3.66 % 171,095 4.76 % 138,081 4.22 % 918 3.40 % 422,813 4.29 %
Real estate - mortgage - residential (1-4 family) first mortgages 24,570 5.16 % 149,886 4.13 % 127,953 3.97 % 455,807 3.86 % 758,216 3.97 %
Real estate - mortgage - home equity loans / lines of credit 42 4.91 % 5 5.50 % 22,419 2.90 % - - % 22,466 2.90 %
Real estate - mortgage - commercial and other 139,742 4.42 % 759,673 4.53 % 737,640 3.99 % 8,327 2.51 % 1,645,382 4.27 %
Consumer loans 1,303 5.67 % 20,073 6.11 % 5,171 7.61 % 2,542 17.55 % 29,089 7.36 %
Total at fixed rates 308,216 4.08 % 1,489,910 3.95 % 1,138,134 3.96 % 548,979 3.75 % 3,485,239 3.93 %
Subtotal 541,595 4.50 % 1,847,705 4.00 % 1,492,582 3.94 % 814,357 3.89 % 4,696,239 4.02 %
Nonaccrual loans 35,076 - - - 35,076
Total loans $ 576,671 $ 1,847,705 $ 1,492,582 $ 814,357 $ 4,731,315
The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
Table 12 Nonperforming Assets
As of December 31,
($ in thousands) 2020 2019 2018 2017 2016
Nonperforming assets
Nonaccrual loans $ 35,076 24,866 22,575 20,968 27,468
Restructured loans - accruing 9,497 9,053 13,418 19,834 22,138
Accruing loans >90 days past due - - - - -
Total nonperforming loans 44,573 33,919 35,993 40,802 49,606
Foreclosed properties 2,424 3,873 7,440 12,571 9,532
Total nonperforming assets $ 46,997 37,792 43,433 53,373 59,138
Purchased credit impaired loans not included above (1) $ 8,591 12,664 17,393 23,165 -
Allowance for loan losses $ 52,388 21,398 21,039 23,298 23,781
Total Loans $ 4,731,315 4,453,466 4,249,064 4,042,369 2,710,712
Asset Quality Ratios
Nonaccrual loans to total loans 0.74 % 0.56 % 0.53 % 0.52 % 1.01 %
Nonperforming loans to total loans 0.94 % 0.76 % 0.85 % 1.01 % 1.83 %
Nonperforming assets to total loans and foreclosed properties 0.99 % 0.85 % 1.02 % 1.32 % 2.17 %
Nonperforming assets to total assets 0.64 % 0.62 % 0.74 % 0.96 % 1.64 %
Allowance for loan losses to nonaccrual loans 149.36 % 86.05 % 93.20 % 111.11 % 86.58 %
(1) In the March 3, 2017 acquisition of Carolina Bank and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9 million, respectively, in purchased credit impaired loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts.
Table 12a Nonperforming Assets by Geographical Region
As of December 31, 2020
($ in thousands) Total Nonperforming
Loans Total Loans Nonperforming Loans to
Total Loans Total Foreclosed Properties
Nonaccrual loans and Troubled Debt Restructurings (1)
Eastern Region (NC) $ 5,388 $ 1,057,000 0.51% $ 545
Triangle Region (NC) 5,338 982,000 0.54% 483
Triad Region (NC) 6,226 810,000 0.77% 72
Charlotte Region (NC) 1,238 358,000 0.35% -
Southern Piedmont Region (NC) 3,244 274,000 1.18% 106
Western Region (NC) 3,225 601,000 0.54% 23
South Carolina Region 1,294 214,000 0.60% 349
PPP Loans - 241,000 -%
Other 18,620 194,000 9.60% 846
Total nonaccrual loans and troubled debt restructurings $ 44,573 $ 4,731,000 0.94% $ 2,424
_____________________________
(1)The counties comprising each region are as follows:
Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret
Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake
Triad North Carolina Region Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth, Alamance
Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg
Southern Piedmont North Carolina Region - Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland
Western North Carolina Region - Buncombe, Henderson, Madison, McDowell, Transylvania
South Carolina Region - Chesterfield, Dillon, Florence
Former Virginia Region - Wythe, Washington, Montgomery, Roanoke
The "Other" line item includes loans originated on a national basis through the Company’s SBA Lending Division and through the Company's Credit Card Division
Table 13 Allocation of the Allowance for Loan Losses
As of December 31,
($ in thousands) 2020 % of
Loan Category 2019 % of
Loan Category 2018 % of
Loan Category 2017 % of
Loan Category 2016 % of
Loan Category
Commercial, financial, and agricultural
$ 11,316 1.45 % 4,553 0.90 % 2,889 0.63 % 3,111 0.82 % 3,829 1.46 %
Real estate - construction, land development
5,355 0.94 % 1,976 0.37 % 2,243 0.43 % 2,816 0.52 % 2,691 0.76 %
Real estate - residential (1-4 family) first mortgages 8,048 0.83 % 3,832 0.35 % 5,197 0.49 % 6,147 0.63 % 7,704 1.03 %
Real estate - mortgage - home equity lines of credit 2,375 0.78 % 1,127 0.33 % 1,665 0.46 % 1,827 0.48 % 2,420 1.01 %
Real estate - mortgage - commercial and other 23,603 1.15 % 8,938 0.47 % 7,983 0.45 % 6,475 0.38 % 5,098 0.49 %
Consumer loans 1,478 2.74 % 972 1.73 % 952 1.33 % 950 1.28 % 1,145 2.08 %
Total allocated
52,175 21,398 20,929 21,326 22,887
Unallocated
213 n/a - n/a 110 n/a 1,972 n/a 894 n/a
Total
$ 52,388 1.11 % 21,398 0.48 % 21,039 0.50 % 23,298 0.58 % 23,781 0.88 %
Note: "% of Loan Category" represents the Allowance for Loan Losses as a percent of the respective total loan categories presented in Table 10.
n/a - not applicable
Table 14 Loan Loss and Recovery Experience
As of December 31,
($ in thousands) 2020 2019 2018 2017 2016
Loans outstanding at end of year $4,731,315 4,453,466 4,249,064 4,042,369 2,710,712
Average amount of loans outstanding $4,702,743 4,346,331 4,161,838 3,420,939 2,603,327
Allowance for loan losses, at beginning of year $ 21,398 21,039 23,298 23,781 28,583
Provision (reversal) for loan losses - non-covered 35,039 2,263 (3,589) 723 2,109
Provision (reversal) for loan losses - covered - - - - (2,132)
Total provision (reversal) for loan losses 35,039 2,263 (3,589) 723 (23)
56,437 23,302 19,709 24,504 28,560
Loans charged off:
Commercial, financial, and agricultural (5,608) (2,473) (2,128) (1,622) (2,033)
Real estate - construction, land development & other land loans (51) (553) (158) (589) (1,101)
Real estate - mortgage - residential (1-4 family) first mortgages (478) (657) (1,734) (2,641) (3,894)
Real estate - mortgage - home equity loans / lines of credit (524) (307) (711) (978) (1,010)
Real estate - mortgage - commercial and other (968) (1,556) (1,459) (1,182) (1,088)
Consumer loans (873) (757) (781) (799) (1,288)
Total charge-offs (8,502) (6,303) (6,971) (7,811) (10,414)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural 745 980 1,195 1,311 817
Real estate - construction, land development & other land loans 1,552 1,275 4,097 2,579 2,690
Real estate - mortgage - residential (1-4 family) first mortgages 754 705 833 1,076 1,207
Real estate - mortgage - home equity loans / lines of credit 487 629 364 333 279
Real estate - mortgage - commercial and other 621 575 1,503 1,027 1,286
Consumer loans 294 235 309 279 406
Total recoveries 4,453 4,399 8,301 6,605 6,685
Net (charge-offs) recoveries (4,049) (1,904) 1,330 (1,206) (3,729)
Allowance removed related to sold loans - - - - (1,050)
Allowance for loan losses, at end of year $ 52,388 21,398 21,039 23,298 24,831
Covered net recoveries included above (1) $ - - - - 1,714
Ratios:
Total net charge-offs (recoveries) as a percent of average loans 0.09 % 0.04 % (0.03 %) 0.04 % 0.14 %
Allowance for loan losses as a percent of loans at end of year 1.11 % 0.48 % 0.50 % 0.58 % 0.88 %
Allowance for loan losses as a multiple of net charge-offs 12.94x 11.24x n/m 19.32x 6.38x
Provision (reversal) for loan losses as a percent of net charge-offs 865.37% 118.86% n/m 59.95 % (0.62 %)
Recoveries of loans previously charged-off as a percent of loans charged-off 52.38 % 69.79 % 119.08 % 84.56 % 64.19 %
(1)On September 22, 2016, all FDIC loss-share agreements were terminated, and accordingly, assets previously covered under those agreements became non-covered on that date.
n/m - not meaningful
Table 14a Loan Loss and Recovery Experience, continued
As of December 31,
($ in thousands) 2020 2019 2018 2017 2016
Net loan (charge-offs) recoveries
Commercial, financial, and agricultural $ (4,863) (1,493) (933) (311) (1,216)
Real estate - construction, land development & other land loans 1,501 722 3,939 1,990 1,589
Real estate - mortgage - residential (1-4 family) first mortgages 276 48 (901) (1,565) (2,687)
Real estate - mortgage - home equity loans / lines of credit (37) 322 (347) (645) (731)
Real estate - mortgage - commercial and other (347) (981) 44 (155) 198
Consumer loans (579) (522) (472) (520) (882)
Total (charge-offs) recoveries $ (4,049) (1,904) 1,330 (1,206) (3,729)
Average loans:
Commercial, financial, and agricultural $ 707,976 482,654 430,449 367,793 246,105
Real estate - construction, land development & other land loans 615,717 503,183 555,354 466,272 323,894
Real estate - mortgage - residential (1-4 family) first mortgages 1,028,334 1,074,938 1,015,360 779,307 743,692
Real estate - mortgage - home equity loans / lines of credit 316,593 346,331 366,416 333,397 238,082
Real estate - mortgage - commercial and other 1,981,763 1,872,666 1,723,117 1,412,511 1,000,341
Consumer loans 52,360 66,559 71,142 61,659 51,213
Total average loans $ 4,702,743 4,346,331 4,161,838 3,420,939 2,603,327
Ratios:
Total net charge-offs (recoveries) as a percent of average loans 0.09 % 0.04 % (0.03 %) 0.04 % 0.14 %
Net charge-offs (recoveries) by loan category as a percent of average loans:
Commercial, financial, and agricultural 0.69 % 0.31 % 0.22 % 0.08 % 0.49 %
Real estate - construction, land development & other land loans (0.24 %) (0.14 %) (0.71 %) (0.43 %) (0.49 %)
Real estate - mortgage - residential (1-4 family) first mortgages (0.03 %) - % 0.09 % 0.20 % 0.36 %
Real estate - mortgage - home equity loans / lines of credit 0.01 % (0.09 %) 0.09 % 0.19 % 0.31 %
Real estate - mortgage - commercial and other 0.02 % 0.05 % - % 0.01 % (0.02 %)
Consumer loans 1.11 % 0.78 % 0.66 % 0.84 % 1.72 %
Table 15 Average Deposits
Year Ended December 31,
2020 2019 2018
($ in thousands) Average
Amount Average
Rate Average
Amount Average
Rate Average
Amount Average
Rate
Interest-bearing checking accounts
$ 1,019,773 0.12 % $ 891,766 0.15 % $ 875,751 0.10 %
Money market accounts
1,367,851 0.34 % 1,111,599 0.63 % 1,023,162 0.32 %
Savings accounts
467,682 0.15 % 419,450 0.29 % 439,880 0.21 %
Time deposits >$100,000
616,171 1.33 % 704,332 1.93 % 641,516 1.30 %
Other time deposits
239,990 0.64 % 260,741 0.73 % 275,904 0.38 %
Total interest-bearing deposits
3,711,467 0.44 % 3,387,888 0.74 % 3,256,213 0.45 %
Noninterest-bearing checking accounts
1,932,823 - 1,436,329 - 1,260,598 -
Total deposits
5,644,290 0.29 % 4,824,217 0.52 % 4,516,811 0.32 %
Table 16 Maturities of Time Deposits
As of December 31, 2020
($ in thousands) 3 Months
or Less Over 3 to 6
Months Over 6 to 12
Months Over 12
Months Total
Time deposits of $100,000 or more $ 183,859 139,653 175,318 65,535 564,365
Time deposits of $250,000 or more Included above $ 123,464 101,947 112,853 37,399 375,663
Table 17 Interest Rate Sensitivity Analysis
Repricing schedule for interest-earning assets and interest-bearing
liabilities held as of December 31, 2020
($ in thousands) 3 Months
or Less Over 3 to 12
Months Total Within
12 Months Over 12
Months Total
Earning assets:
Loans (1)
$ 1,146,012 256,236 1,402,248 3,329,067 4,731,315
Securities available for sale (2)
66,359 187,407 253,766 1,199,366 1,453,132
Securities held to maturity (2)
6,965 10,993 17,958 149,593 167,551
Other earning assets, primarily short-term investments
321,692 - 321,692 17,671 339,363
Total earning assets
$ 1,541,028 454,636 1,995,664 4,695,697 6,691,361
Percent of total earning assets 23.03 % 6.79 % 29.82 % 70.18 % 100.00 %
Cumulative percent of total earning assets 23.03 % 29.82 % 29.82 % 100.00 % 100.00 %
Interest-bearing liabilities:
Interest-bearing checking accounts
$ 1,172,022 - 1,172,022 - 1,172,022
Money market accounts
1,581,364 - 1,581,364 - 1,581,364
Savings accounts
519,266 - 519,266 - 519,266
Time deposits of $100,000 or more
183,859 314,971 498,830 65,535 564,365
Other time deposits
52,285 130,603 182,888 43,679 226,567
Borrowings
54,200 - 54,200 7,629 61,829
Total interest-bearing liabilities
$ 3,562,996 445,574 4,008,570 116,843 4,125,413
Percent of total interest-bearing liabilities 86.37 % 10.80 % 97.17 % 2.83 % 100.00 %
Cumulative percent of total interest-bearing liabilities 86.37 % 97.17 % 97.17 % 100.00 % 100.00 %
Interest sensitivity gap $ (2,021,968) 9,062 (2,012,906) 4,578,854 2,565,948
Cumulative interest sensitivity gap $ (2,021,968) (2,012,906) (2,012,906) 2,565,948 2,565,948
Cumulative interest sensitivity gap as a percent of total earning assets
(30.22 %) (30.08 %) (30.08 %) 38.35 % 38.35 %
Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities
43.25 % 49.78 % 49.78 % 162.20 % 162.20 %
____________________________________
(1)The three months or less category for loans includes $455,757 in adjustable rate loans that are at their contractual rate floors. Of that amount, approximately $206,741 will reprice higher within the next 100 basis points of increases in the underlying interest rate.
(2)Securities available for sale include government-sponsored enterprise securities, mortgage-backed securities, and corporate bonds. Securities held to maturity include mortgage-backed securities and state and local government securities. For fixed rate mortgage-backed securities, the principal is assumed to reprice equally over the average life of the underlying security. All other fixed rate securities are assumed to reprice based on maturity date or call date. Variable rate securities are included in the period in which they are subject to reprice.
Table 18 Contractual Obligations and Other Commercial Commitments
Payments Due by Period ($ in thousands)
Contractual Obligations
As of December 31, 2020 Total Less
than 1 Year 1-3 Years 4-5 Years After 5 Years
Borrowings $ 61,829 1,129 3,228 2,096 55,376
Operating leases 26,736 2,245 3,505 2,714 18,272
Time deposits 790,932 681,719 84,493 24,046 674
Non-qualified postretirement plan liabilities 9,310 330 648 658 7,674
Committed investment obligations 6,342 6,342 - - -
Estimated interest expense on borrowings and time deposits (1) 22,568 4,565 3,940 3,021 11,042
Total contractual cash obligations $ 917,717 696,330 95,814 32,535 93,038
(1) Represents forecasted interest expense on borrowings and time deposits based on interest rates at December 31, 2020. 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, 2020 Total
Amounts
Committed Less
than 1 Year 1-3 Years 4-5 Years After 5 Years
Credit cards
$ 145,669 72,835 72,834
Lines of credit and loan commitments
1,275,354 560,702 254,859 58,619 401,174
Standby letters of credit
14,061 13,482 578 1 -
Total commercial commitments
$ 1,435,084 647,019 328,271 58,620 401,174
Table 19 Market Risk Sensitive Instruments
Expected Maturities of Market Sensitive Instruments Held
at December 31, 2020 Occurring in Indicated Year
($ in thousands) 2021 2022 2023 2024 2025 Beyond Total Average
Interest
Rate Estimated
Fair
Value
Due from banks, interest-bearing
$ 273,566 - - - - - 273,566 0.09 % $ 273,566
Presold mortgages in process of settlement
42,271 - - - - - 42,271 2.72 % 42,271
SBA loans held for sale 6,077 - - - - - 6,077 5.65 % 7,465
Debt Securities - at amortized cost (1) (2)
262,195 260,431 261,928 234,584 237,617 343,480 1,600,235 1.68 % 1,623,866
Loans - fixed (3) (4)
308,216 539,822 308,930 362,341 284,459 1,681,471 3,485,239 3.93 % 3,478,634
Loans - adjustable (3) (4)
233,379 134,730 95,279 76,133 54,141 617,338 1,211,000 4.28 % 1,199,875
Total
$ 1,125,704 934,983 666,137 673,058 576,217 2,642,289 6,618,388 3.29 % $ 6,625,677
Interest-bearing checking accounts
$ 1,172,022 - - - - - 1,172,022 0.08 % $ 1,172,022
Money market accounts
1,581,364 - - - - - 1,581,364 0.23 % 1,581,364
Savings accounts
519,266 - - - - - 519,266 0.10 % 519,266
Time deposits
681,719 63,423 21,070 8,217 15,829 674 790,932 0.67 % 792,665
Borrowings - fixed
1,129 1,237 1,991 1,047 1,049 1,178 7,631 1.68 % 7,893
Borrowings - adjustable
- - - - - 54,198 54,198 2.20 % 45,428
Total
$ 3,955,500 64,660 23,061 9,264 16,878 56,050 4,125,413 0.29 % $ 4,118,638
______________________
(1)Tax-exempt securities are reflected at a tax-equivalent basis using a 22.98% tax rate.
(2)Securities with call dates within 12 months of December 31, 2020 that have above market interest rates are assumed to mature at their call date for purposes of this table. Mortgage securities are assumed to mature in the period of their expected repayment based on estimated prepayment speeds.
(3)Excludes nonaccrual loans.
(4)Loans are shown in the period of their contractual maturity.
(5)Excludes the Company's investment in FHLB stock and FRB stock due to their perpetual nature.
Table 20 Risk-Based and Leverage Capital Ratios
As of December 31,
($ in thousands) 2020 2019 2018
Risk-Based and Leverage Capital
Common Equity Tier I capital:
Shareholders’ equity
$ 893,421 852,401 764,230
Intangible assets, net of deferred tax liability
(239,702) (236,636) (240,625)
Accumulated other comprehensive income adjustments
(14,350) (5,123) 11,961
Total Common Equity Tier I capital
639,369 610,642 535,566
Tier I capital:
Trust preferred securities eligible for Tier I capital treatment 52,496 52,345 52,198
Deductions from Tier I capital - - -
Total Tier I leverage capital
691,865 662,987 587,764
Tier II capital:
Allowable allowance for loan losses 52,388 21,398 21,039
Other Tier II capital 582 546 625
Tier II capital additions
52,970 21,944 21,664
Total capital $ 744,835 684,931 609,428
Total risk weighted assets $ 4,846,322 4,599,799 4,361,238
Adjusted fourth quarter average assets $ 7,001,834 5,924,020 5,612,092
Risk-based capital ratios:
Common equity Tier I capital to Tier I risk adjusted assets 13.19 % 13.28 % 12.28 %
Minimum required under Basel III
7.00 % 7.00 % 6.375 %
Fully phased-in minimum under Basel III
7.00 % 7.00 % 7.00 %
Tier I capital to Tier I risk adjusted assets 14.28 % 14.41 % 13.48 %
Minimum required under Basel III
8.50 % 8.50 % 7.875 %
Fully phased-in minimum under Basel III
8.50 % 8.50 % 8.50 %
Total risk-based capital to Tier II risk-adjusted assets 15.37 % 14.89 % 13.97 %
Minimum required under Basel III
10.50 % 10.50 % 9.875 %
Fully phased-in minimum under Basel III
10.50 % 10.50 % 10.50 %
Leverage capital ratios:
Tier I leverage capital to adjusted fourth quarter average assets 9.88 % 11.19 % 10.47 %
Minimum required under Basel III
4.00 % 4.00 % 4.00 %
Fully phased-in minimum under Basel III
4.00 % 4.00 % 4.00 %
Table 21 Quarterly Financial Summary (Unaudited)
2020 2019
($ in thousands except
per share data) Fourth
Quarter Third
Quarter Second
Quarter First
Quarter Fourth
Quarter Third
Quarter Second
Quarter First
Quarter
Income Statement Data
Interest income, taxable equivalent
$ 59,780 59,035 57,970 62,367 63,351 62,795 63,445 62,159
Interest expense
3,317 3,955 5,016 7,274 8,313 8,604 8,613 8,374
Net interest income, taxable equivalent
56,463 55,080 52,954 55,093 55,038 54,191 54,832 53,785
Taxable equivalent, adjustment
457 347 330 334 382 413 423 424
Net interest income
56,006 54,733 52,624 54,759 54,656 53,778 54,409 53,361
Provision (reversal) for loan losses
4,031 6,120 19,298 5,590 3,176 (1,105) (308) 500
Net interest income after provision for losses
51,975 48,613 33,326 49,169 51,480 54,883 54,717 52,861
Noninterest income - see Note 19,996 21,452 26,193 13,705 14,662 15,156 15,634 14,078
Noninterest expense
41,882 40,439 38,901 40,076 39,891 38,446 40,084 38,774
Income before income taxes
30,089 29,626 20,618 22,798 26,251 31,593 30,267 28,165
Income taxes
6,441 6,329 4,266 4,618 5,368 6,574 6,408 5,880
Net income
23,648 23,297 16,352 18,180 20,883 25,019 23,859 22,285
Per Common Share Data
Earnings per common share - basic
$ 0.83 0.81 0.56 0.62 0.71 0.84 0.80 0.75
Earnings per common share - diluted
0.83 0.81 0.56 0.62 0.71 0.84 0.80 0.75
Cash dividends declared
0.18 0.18 0.18 0.18 0.18 0.12 0.12 0.12
Market Price
High
34.78 25.20 29.65 40.00 41.34 37.65 39.49 39.82
Low
20.44 19.60 19.26 17.32 34.51 34.13 33.99 31.22
Close
33.83 20.93 25.08 23.08 39.91 35.90 36.42 34.76
Stated book value - common
31.26 30.70 29.95 29.69 28.80 28.20 27.43 26.50
Selected Average Balances
Assets
$ 7,240,685 6,904,112 6,727,762 6,183,098 6,159,232 6,021,979 5,994,595 5,945,049
Loans
4,771,446 4,785,848 4,738,702 4,512,893 4,419,982 4,354,477 4,329,866 4,280,272
Earning assets
6,640,732 6,294,556 6,102,012 5,595,734 5,560,099 5,440,014 5,417,284 5,372,766
Deposits
6,232,692 5,882,792 5,502,356 4,950,199 4,939,182 4,838,574 4,810,019 4,704,231
Interest-bearing liabilities
4,085,619 3,878,783 3,885,903 3,739,467 3,716,248 3,678,530 3,716,092 3,773,714
Shareholders’ equity
889,481 878,325 871,495 858,592 847,317 826,914 802,131 775,059
Ratios (annualized where applicable)
Return on average assets
1.30 % 1.34 % 0.98 % 1.18 % 1.35 % 1.65 % 1.60 % 1.52 %
Return on average common equity
10.58 % 10.55 % 7.55 % 8.52 % 9.78 % 12.00 % 11.93 % 11.66 %
Equity to assets at end of period
12.26 % 12.47 % 12.60 % 13.52 % 13.87 % 13.76 % 13.56 % 13.03 %
Average loans to average deposits
76.56 % 81.35 % 86.12 % 91.17 % 89.49 % 90.00 % 90.02 % 90.99 %
Average earning assets to interest-bearing liabilities
162.54 % 162.28 % 157.03 % 149.64 % 149.62 % 147.89 % 145.78 % 142.37 %
Net interest margin
3.38 % 3.48 % 3.49 % 3.96 % 3.93 % 3.95 % 4.06 % 4.06 %
Allowance for loan losses to gross loans
1.11 % 1.02 % 0.89 % 0.54 % 0.48 % 0.44 % 0.48 % 0.49 %
Nonperforming loans as a percent of total loans
0.94 % 0.86 % 0.94 % 0.76 % 0.76 % 0.67 % 0.67 % 0.77 %
Nonperforming assets as a percent of total assets
0.64 % 0.63 % 0.69 % 0.60 % 0.62 % 0.56 % 0.57 % 0.65 %
Net charge-offs (recoveries) as a percent of average total loans
0.07 % (0.06) % 0.12 % 0.22 % 0.09 % 0.04 % - % 0.04 %
Note: In the second quarter of 2020, the Company recorded $8.0 million in gains on the sale of available for sale securities, which are included in noninterest income for that quarter.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
First Bancorp and Subsidiaries
Consolidated Balance Sheets
December 31, 2020 and 2019
($ in thousands) 2020 2019
Assets
Cash and due from banks, noninterest-bearing
$ 93,724 64,519
Due from banks, interest-bearing
273,566 166,783
Total cash and cash equivalents
367,290 231,302
Securities available for sale
1,453,132 821,945
Securities held to maturity (fair values of $170,734 in 2020 and $68,333 in 2019) 167,551 67,932
Presold mortgages in process of settlement
42,271 19,712
SBA loans held for sale 6,077 -
Loans
4,731,315 4,453,466
Allowance for loan losses
(52,388) (21,398)
Net loans 4,678,927 4,432,068
Premises and equipment
120,502 114,859
Operating right-of-use lease assets
17,514 19,669
Accrued interest receivable
20,272 16,648
Goodwill
239,272 234,368
Other intangible assets
15,366 17,217
Foreclosed properties
2,424 3,873
Bank-owned life insurance
106,974 104,441
Other assets
52,179 59,605
Total assets $ 7,289,751 6,143,639
Liabilities
Deposits: Noninterest-bearing checking accounts
$ 2,210,012 1,515,977
Interest-bearing checking accounts
1,172,022 912,784
Money market accounts
1,581,364 1,173,107
Savings accounts
519,266 424,415
Time deposits of $100,000 or more
564,365 649,947
Other time deposits
226,567 255,125
Total deposits
6,273,596 4,931,355
Borrowings
61,829 300,671
Accrued interest payable
904 2,154
Operating lease liabilities
17,868 19,855
Other liabilities
42,133 37,203
Total liabilities
6,396,330 5,291,238
Commitments and contingencies (see Note 12)
Shareholders’ Equity
Preferred stock, no par value per share. Authorized: 5,000,000 shares
Issued & outstanding: none in 2020 and 2019 - -
Common stock, no par value per share. Authorized: 40,000,000 shares
Issued & outstanding: 28,579,335 shares in 2020 and 29,601,264 shares in 2019 400,582 429,514
Retained earnings
478,489 417,764
Stock in rabbi trust assumed in acquisition
(2,243) (2,587)
Rabbi trust obligation
2,243 2,587
Accumulated other comprehensive income (loss)
14,350 5,123
Total shareholders’ equity
893,421 852,401
Total liabilities and shareholders’ equity $ 7,289,751 6,143,639
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2020, 2019 and 2018
($ in thousands, except per share data) 2020 2019 2018
Interest Income
Interest and fees on loans
$ 213,099 220,784 208,609
Interest on investment securities:
Taxable interest income
20,429 19,881 10,638
Tax-exempt interest income
725 1,007 1,482
Other, principally overnight investments
3,431 8,435 10,478
Total interest income
237,684 250,107 231,207
Interest Expense
Savings, checking and money market accounts
6,551 9,551 5,074
Time deposits of $100,000 or more
8,215 13,598 8,356
Other time deposits
1,535 1,901 1,061
Borrowings
3,261 8,853 9,286
Total interest expense
19,562 33,903 23,777
Net interest income
218,122 216,204 207,430
Provision (reversal) for loan losses
35,039 2,263 (3,589)
Net interest income after provision for loan losses
183,083 213,941 211,019
Noninterest Income
Service charges on deposit accounts
11,098 12,970 12,690
Other service charges, commissions and fees
20,097 19,481 16,488
Fees from presold mortgage loans
14,183 3,944 2,735
Commissions from sales of insurance and financial products
8,848 8,495 8,731
SBA consulting fees
8,644 3,872 4,675
SBA loan sale gains
7,973 8,275 10,366
Bank-owned life insurance income
2,533 2,564 2,534
Securities gains, net 8,024 97 -
Other gains (losses), net
(54) (169) 723
Total noninterest income
81,346 59,529 58,942
Noninterest Expenses
Salaries
84,941 79,129 75,077
Employee benefits
16,027 16,844 16,888
Total personnel expense
100,968 95,973 91,965
Occupancy expense
11,278 11,122 10,793
Equipment related expenses
4,285 5,023 5,627
Merger and acquisition expenses
- 192 2,358
Intangibles amortization
3,956 4,858 5,917
Foreclosed property losses, net
547 939 565
Other operating expenses
40,264 39,087 39,258
Total noninterest expenses
161,298 157,194 156,483
Income before income taxes
103,131 116,276 113,478
Income tax expense
21,654 24,230 24,189
Net income
$ 81,477 92,046 89,289
Earnings per common share: Basic
$ 2.81 3.10 3.02
Earnings per common share: Diluted
2.81 3.10 3.01
Dividends declared per common share
$ 0.72 0.54 0.40
Weighted average common shares outstanding:
Basic
28,839,866 29,547,851 29,566,259
Diluted
28,981,567 29,720,499 29,707,431
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2020, 2019 and 2018
($ in thousands) 2020 2019 2018
Net income $ 81,477 92,046 89,289
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, pretax
18,729 22,230 (10,179)
Tax (expense) benefit
(4,304) (5,157) 2,379
Reclassification to realized (gains) losses
(8,024) (97) -
Tax expense (benefit)
1,844 22 -
Postretirement plans:
Net gain (loss) arising during period 589 (686) (41)
Tax (expense) benefit (135) 158 10
Amortization of unrecognized net actuarial loss
686 814 21
Tax benefit
(158) (200) (5)
Other comprehensive income (loss)
9,227 17,084 (7,815)
Comprehensive income
$ 90,704 109,130 81,474
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Shareholders’ Equity
Years Ended December 31, 2020, 2019 and 2018
(In thousands, except per share) Common Stock Retained
Earnings Stock in
rabbi
trust
assumed
in
acquisition Rabbi trust
obligation Accumulated
Other
Comprehensive
Income
(Loss) Total
Shareholders’ Equity
Shares Amount
Balances, January 1, 2018 29,639 $ 432,794 264,331 (3,581) 3,581 (4,146) 692,979
Net income 89,289 89,289
Cash dividends declared ($0.40 per common share) (11,882) (11,882)
Change in Rabbi Trust Obligation 346 (346) -
Stock option exercises 25 324 324
Stock withheld for payment of taxes (11) (406) (406)
Stock-based compensation 72 1,741 1,741
Other comprehensive loss (7,815) (7,815)
Balances, December 31, 2018 29,725 434,453 341,738 (3,235) 3,235 (11,961) 764,230
Net income 92,046 92,046
Cash dividends declared ($0.54 per common share) (16,020) (16,020)
Change in Rabbi Trust Obligation 648 (648) -
Equity issued related to acquisition earn-out 78 3,070 3,070
Stock repurchases (282) (10,000) (10,000)
Stock option exercises 9 129 129
Stock withheld for payment of taxes (20) (702) (702)
Stock-based compensation 91 2,564 2,564
Other comprehensive income 17,084 17,084
Balances, December 31, 2019 29,601 429,514 417,764 (2,587) 2,587 5,123 852,401
Net income 81,477 81,477
Cash dividends declared ($0.72 per common share) (20,752) (20,752)
Change in Rabbi Trust Obligation 344 (344) -
Equity issued related to acquisition 24 494 494
Stock repurchases (1,117) (31,868) (31,868)
Stock withheld for payment of taxes (11) (307) (307)
Stock-based compensation 82 2,749 2,749
Other comprehensive income 9,227 9,227
Balances, December 31, 2020 28,579 $ 400,582 478,489 (2,243) 2,243 14,350 893,421
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019 and 2018
($ in thousands) 2020 2019 2018
Cash Flows From Operating Activities
Net income $ 81,477 92,046 89,289
Reconciliation of net income to net cash provided by operating activities:
Provision (reversal) for loan losses 35,039 2,263 (3,589)
Net security premium amortization 5,019 2,653 2,749
Loan discount accretion (6,328) (5,974) (7,812)
Other purchase accounting accretion and amortization, net 81 (9) (190)
Foreclosed property losses and write-downs, net 547 939 565
Gains on securities available for sale (8,024) (97) -
Other losses (gains) 54 169 (723)
Bank-owned life insurance income (2,533) (2,564) (2,534)
Decrease (increase) in net deferred loan costs 5,639 (642) (2,285)
Depreciation of premises and equipment 5,838 5,836 6,077
Amortization of operating lease right-of-use assets 2,012 1,857 -
Repayments of lease obligations (1,844) (1,669) -
Stock-based compensation expense 2,540 2,270 1,569
Amortization of intangible assets 3,956 4,858 5,917
Amortization of SBA servicing assets 1,795 1,340 846
Gains from sale of presold mortgage and SBA loans (22,156) (12,219) (13,101)
Originations of presold mortgage loans in process of settlement (418,394) (173,705) (118,791)
Proceeds from sales of presold mortgage loans in process of settlement 410,898 162,476 129,519
Origination of SBA loans for sale (147,934) (150,677) (196,784)
Proceeds from sales of SBA loans 115,460 124,527 157,427
Increase in accrued interest receivable (3,624) (644) (1,910)
(Increase) decrease in other assets (991) (3,171) 6,059
(Decrease) increase in accrued interest payable (1,250) 178 741
(Decrease) increase in net deferred income tax liability (10,007) 1,588 1,601
Increase (decrease) in other liabilities 9,805 (391) (8,230)
Net cash provided by operating activities 57,075 51,238 46,410
Cash Flows From Investing Activities
Purchases of securities available for sale (1,060,054) (498,891) (230,794)
Purchases of securities held to maturity (133,611) - -
Proceeds from maturities/issuer calls of securities available for sale 223,842 158,920 60,871
Proceeds from maturities/issuer calls of securities held to maturity 33,030 32,461 16,183
Proceeds from sales of securities available for sale 219,697 39,797 -
Redemptions (purchases) of FRB and FHLB stock, net 9,851 4,088 (6,129)
Net increase in loans (233,788) (165,203) (152,972)
Proceeds from sales of foreclosed properties 2,485 5,877 7,532
Purchases of premises and equipment (12,363) (3,534) (10,723)
Proceeds from sales of premises and equipment 189 1,799 2,753
Net cash paid in acquisition (9,559) - -
Net cash used by investing activities (960,281) (424,686) (313,279)
Cash Flows From Financing Activities
Net increase in deposits 1,342,340 272,206 252,756
Net (decrease) increase in short-term borrowings (198,000) (55,000) 50,000
Proceeds from long-term borrowings 150,000 - 50,000
Payments on long-term borrowings (202,035) (51,119) (101,116)
Cash dividends paid - common stock (20,936) (13,662) (11,281)
Repurchases of common stock (31,868) (10,000) -
Proceeds from stock option exercises - 129 324
Payment of taxes related to stock withheld (307) (702) (406)
Net cash provided by financing activities 1,039,194 141,852 240,277
Increase (decrease) in Cash and Cash Equivalents 135,988 (231,596) (26,592)
Cash and Cash Equivalents, Beginning of Year 231,302 462,898 489,490
Cash and Cash Equivalents, End of Year $ 367,290 231,302 462,898
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest 20,812 33,725 23,036
Cash paid during the period for income taxes 29,604 24,336 21,162
Non-cash: Foreclosed loans transferred to foreclosed real estate 1,583 3,249 4,148
Non-cash: Unrealized gain (loss) on securities available for sale, net of taxes 14,425 17,073 (7,800)
Non-cash: Initial recognition of operating lease right-of-use assets and liabilities 253 19,406 -
Non-cash: Equity issued related to acquisitions 494 3,070 -
Non-cash: Loans acquired 14,633 - -
Non-cash: Other assets acquired 451 - -
Non-cash: Borrowings assumed 11,671 - -
See accompanying notes to consolidated financial statements.
First Bancorp and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 four wholly owned subsidiaries that are fully consolidated - First Bank Insurance Services, Inc. (“First Bank Insurance”), SBA Complete, Inc. (“SBA Complete”), Magnolia Financial, Inc. ("Magnolia Financial"), and First Troy SPE, LLC. All significant intercompany accounts and transactions have been eliminated. Subsequent events have been evaluated through the date of filing this Form 10-K.
The Company is a bank holding company. The principal activity of the Company is the ownership and operation of the Bank, a state chartered bank with its main office in Southern Pines, North Carolina. The Company is also the parent company for a series of statutory trusts that were formed at various times since 2002 for the purpose of issuing trust preferred debt securities. The trusts are not consolidated for financial reporting purposes; however, notes issued by the Company to the trusts in return for the proceeds from the issuance of the trust preferred securities are included in the consolidated financial statements and have terms that are substantially the same as the corresponding trust preferred securities. The trust preferred securities qualify as capital for regulatory capital adequacy requirements. First Bank Insurance is an agent for property and casualty insurance policies. SBA Complete specializes in providing consulting services for financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. Magnolia Financial is a business financing company that makes loans throughout the southeastern United States. First Troy SPE, LLC was formed in order to hold and dispose of certain real estate foreclosed upon by the Bank.
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates made by the Company in the preparation of its consolidated financial statements are the determination of the allowance for loan losses, the valuation of other real estate, the accounting and impairment testing related to intangible assets, and the fair value and discount accretion of acquired loans.
Operating, Accounting and Reporting Considerations related to COVID-19 - The coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies have impacted and may continue to impact many of the Company’s customers. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time. The Company has provided hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encouraged customers to reach out for assistance to support their individual circumstances.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, which the Company has applied, loan modifications deemed to be COVID-19-related are not considered a troubled debt restructuring (“TDR”) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. In December 2020, this CARES Act provision was extended to December 31, 2021. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification would not meet the requirements under accounting principles generally accepted in the United States of America to be a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. The Company generally offered impacted borrowers loan payment deferrals of 90 days in duration. The Company offered subsequent 90 day deferrals if requested by the borrower. Any deferred amounts were generally added by the Company to the payoff balance of the loan at maturity. Most of the deferral requests occurred during the second quarter of 2020, and in the second half of 2020, most of those borrowers resumed payments. As of December 31, 2020, the Company had remaining payment deferrals of $16.6 million.
Additionally, the Company is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender under such programs created in the future. These programs are recent and their effects on the Company’s business remain uncertain. The Company originated $245 million in PPP loans during the second quarter of 2020. The Company began accepting and transmitting PPP loan forgiveness documentation to the SBA in the fourth quarter of 2020 and had received $4.0 million in PPP forgiveness payoffs from the SBA as of December 31, 2020. At December 31, 2020, the Company had 2,676 PPP loans outstanding totaling approximately $241 million.
In December 2020, the Bipartisan-Bicameral Omnibus COVID Relief Deal, included as a component of appropriations legislation, and the Economic Aid Act were enacted to provide economic stimulus to individuals and businesses in further response to the economic distress caused by the COVID-19 pandemic. Among other things, the legislation includes stimulus payment for individuals under certain income thresholds, extension of enhanced unemployment benefits, a rental assistance program, an extension of the eviction moratorium, targeted funding related to public health measures and small business relief, which included additional funds for PPP loans.
In a period of economic contraction, elevated levels of loan losses and lost interest income may occur. The Company continues to accrue interest on loans modified in accordance with the CARES Act. To the extent those borrowers are unable to resume normal contractual payments, the Company could experience additional losses of principal and interest. The extent to which the COVID-19 pandemic has a further impact the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
Business Combinations - The Company accounts for business combinations using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value.
The Company typically issues common stock and/or pays cash for an acquisition, depending on the terms of the acquisition agreement. The value of common shares issued is determined based on the market price of the stock as of the closing of the acquisition.
Cash and Cash Equivalents - The Company considers all highly liquid assets with original maturities of 90 days or less, such as cash on hand, noninterest-bearing and interest-bearing amounts due from banks and federal funds sold, to be “cash equivalents.”
Securities - Debt securities that the Company has the positive intent and ability to hold to maturity are classified as “held to maturity” and carried at amortized cost. Debt securities not classified as held to maturity are classified as “available for sale” and carried at fair value, with unrealized gains and losses being reported as other comprehensive income or loss and reported as a separate component of shareholders’ equity.
A decline in the market value of any available for sale or held to maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established.
Gains and losses on sales of securities are recognized at the time of sale based upon the specific identification method. Premiums and discounts are amortized into income on a level yield basis, with premiums being amortized to the earliest call date and discounts being accreted to the stated maturity date.
Presold Mortgages in Process of Settlement - As a part of normal business operations, the Company originates residential mortgage loans that have been pre-approved by secondary investors to be sold on a best efforts basis. The terms of the loans are set by the secondary investors, and the purchase price that the investor will pay for the loan is agreed to prior to the funding of the loan by the Company. Generally within three weeks after funding, the loans are transferred to the investor in accordance with the agreed-upon terms. The Company records gains from the sale of these loans on the settlement date of the sale equal to the difference between the proceeds received and the carrying amount of the loan. Additionally, the Company records gains for loans in the process of closing, based on the changes in fair value of the loans and related commitments. Between the initial funding of the loans
by the Company and the subsequent reimbursement by the investors, the Company carries the loans on its balance sheet at fair value.
Periodically, the Company originates other types of commercial loans and decides to sell them in the secondary market. The Company carries these loans at the lower of cost or fair value at each reporting date. There were no such loans held for sale as of December 31, 2020 or 2019, respectively.
SBA Loans Held for Sale - SBA Loans Held for Sale represent the guaranteed portion of SBA loans that the Company intends to sell in the near future. These loans are carried at the lower of cost or market as determined on an individual loan basis. There were $6.1 million in SBA loans held for sale as of December 31, 2020 and none at December 31, 2019, respectively.
Loans - Loans are stated at the principal amount outstanding less any partial charge-offs plus deferred origination costs, net of nonrefundable loan fees. Interest on loans is accrued on the unpaid principal balance outstanding. Net deferred loan origination costs/fees are capitalized and recognized as a yield adjustment over the life of the related loan.
Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. No allowance for loan losses is carried over from the seller or otherwise recorded on the purchase date.
The Company follows specific accounting guidance related to purchased impaired loans. A loan is considered to be a purchased credit impaired loan when purchased loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due, risk grade and nonaccrual status. At the acquisition date, when possible, a stream of expected cash flows is estimated and compared to the estimated fair value in order to determine the accretable yield amount, which is then recognized over the life of the loan based on the effective yield method. Throughout the life of the loan, the stream of expected cash flows may change based on actual results of the loan or the assumptions related to the future performance. Subsequent changes of expected cash flows may result in changes to accretable yield if the present value of expected cash flows exceeds the carrying value or an impairment reserve if the present value of expected cash flows is less than the carrying amount.
For purchased impaired loans for which the timing and amount of cash flows expected to be collected cannot be reasonably estimated, the Company uses the cost recovery method of income recognition. Under the cost recovery method of income recognition, all cash receipts are initially applied to principal, with interest income being recorded only after the carrying value of the loan has been reduced to zero.
For nonimpaired purchased loans, the Company accretes any fair value discount over the life of the loan in a manner consistent with the guidance for accounting for loan origination fees and costs. An allowance for loan losses is recorded for these loans when the estimated credit losses exceed the remaining unamortized discounts, based on pools of similar loans.
A loan is placed on nonaccrual status when, in management’s judgment, the collection of interest appears doubtful. The accrual of interest is discontinued on substantially all loans that become 90 days or more past due with respect to principal or interest. The past due status of loans is based on the contractual payment terms. While a loan is on nonaccrual status, the Company’s policy is that all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously charged off. Further cash receipts are recorded as interest income to the extent that any interest has been foregone. Loans are removed from nonaccrual status when they become current as to both principal and interest, when concern no longer exists as to the collectability of principal or interest, and when the loan has provided generally six months of satisfactory payment performance. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the originally contracted terms. For a nonaccrual loan that has been restructured, if the borrower has six months of satisfactory performance under the restructured terms and it is reasonably assured that the borrower will continue to be able to comply with the restructured terms, the loan may be returned to accruing status. The nonaccrual policy discussed above applies to all loan classifications.
A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold
(which varies based on credit quality, accruing status, troubled debt restructured status, and type of collateral) and the loan is determined to be impaired. Impaired loans are measured using either 1) an estimate of the cash flows that the Company expects to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral less estimated selling costs. Unless restructured, while a loan is considered to be impaired, the Company’s policy is that interest accrual is discontinued and all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to recoveries of any amounts previously charged off. Further cash receipts are recorded as interest income to the extent that any interest has been foregone. Impaired loans that are restructured are returned to accruing status in accordance with the restructured terms if the Company believes that the borrower will be able to meet the obligations of the restructured loan terms, and the loan has provided generally six months of satisfactory payment performance. The impairment policy discussed above applies to all loan classifications.
SBA Loan Originations - Through its SBA Lending Division, the Company offers loans guaranteed by the Small Business Administration (“SBA”) for the purchase of businesses, business startups, business expansion, equipment, and working capital. All SBA loans are underwritten and documented as prescribed by the SBA. SBA loans are generally fully amortizing and have maturity dates and amortizations of up to 25 years. The portion of SBA loans originated that are guaranteed and intended for sale on the secondary market are classified as held for sale and are carried at the lower of cost or fair value. The Company generally sells the guaranteed portion of the SBA loan as soon as it is eligible to be sold and retains the servicing right. When the guaranteed portion of an SBA loan is sold, the Company allocates the carrying basis of the loan between the guaranteed portion of the loan sold, the unguaranteed portion of the loans retained, and the servicing asset based on their relative fair values. A gain is recorded for the difference between the proceeds received from the sale and the basis allocated to the sold portion. The relative fair value allocation results in a discount that is recorded on the unguaranteed portion of the loan that is retained. The discount is amortized as a yield adjustment over the life of the loan, so long as the loan performs. In the event the loan is moved to nonaccrual status, the Company ceases the amortization of the discount and upon any subsequent transfer to foreclosed properties or liquidation of the loan, the remaining discount is amortized, along with any remaining servicing asset and deferred loan costs.
The foregoing discussion relates to the Company's activities in the SBA's Section 7(a) and similar programs. For information on the Company's participation in the SBA's PPP program, see Note 4 below.
Also see SBA Servicing Assets below.
Allowance for Loan Losses - The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged-off against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Recoveries on loans previously charged-off are added back to the allowance. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio. Management’s determination of the adequacy of the allowance is based on several factors, including:
1.Risk grades assigned to the loans in the portfolio,
2.Specific reserves for individually evaluated impaired loans,
3.Current economic conditions, including the local, state, and national economic outlook; interest rate risk; trends in loan volume, mix and size of loans; levels and trends of delinquencies,
4.Historical loan loss experience, and
5.An assessment of the risk characteristics of the Company’s loan portfolio, including industry concentrations, payment structures, changes in property values, and credit administration practices.
The Company segments the loan portfolio into broad categories with similar risk elements for the purposes of computing the allowance for loan losses. Those categories and their specific risks are described below.
Commercial, financial, and agricultural - Risks to this loan category include industry concentration and the inability to monitor the condition of the collateral which often consists of inventory, accounts receivable and other non-real estate assets. Equipment and inventory obsolescence can also pose a risk. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. Also included in this category for 2020 are PPP loans, which are fully guaranteed by the SBA and thus have minimal risk.
Real estate - construction, land development, & other land loans - Risks common to commercial construction loans are cost overruns, changes in market demand for property, inadequate long-term financing arrangements and declines in real estate values. Residential construction loans are susceptible to those same risks as well as those
associated with residential mortgage loans (see below). Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates.
Real estate - mortgage - residential (1-4 family) first - Residential mortgage loans are susceptible to weakening general economic conditions and increases in unemployment rates and declining real estate values.
Real estate - mortgage - home equity loans / lines of credit - Risks common to home equity loans and lines of credit are general economic conditions, including an increase in unemployment rates, and declining real estate values which reduce or eliminate the borrower’s home equity.
Real estate - mortgage - commercial and other - Loans in this category are susceptible to declines in occupancy rates, business failure and general economic conditions. Also, declines in real estate values and lack of suitable alternative use for the properties are risks for loans in this category.
Consumer loans - Risks common to these loans include regulatory risks, unemployment and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property.
While management uses the best information available to make evaluations, future adjustments may be necessary if economic and other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.
Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over financial assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Premises and Equipment - Premises and equipment are stated at cost less accumulated depreciation. Depreciation, computed by the straight-line method, is charged to operations over the estimated useful lives of the properties, which range from 2 to 40 years or, in the case of leasehold improvements, over the term of the lease, if shorter. Land is carried at cost. Maintenance and repairs are charged to operations in the year incurred. Gains and losses on dispositions are included in current operations.
Goodwill and Other Intangible Assets - Business combinations are accounted for using the acquisition method of accounting. Identifiable intangible assets are recognized separately and are amortized over their estimated useful lives, which for the Company has generally been seven to ten years and at an accelerated rate. Goodwill is recognized in business combinations to the extent that the price paid exceeds the fair value of the net assets acquired, including any identifiable intangible assets. Goodwill is not amortized is subject to fair value impairment tests on at least an annual basis.
SBA Servicing Assets - When the Company sells the guaranteed portion of an SBA loan, the Company continues to perform the servicing on the loan and collects a fee related to the sold portion of the loan. A SBA servicing asset is recorded for the fair value of that fee based on a discounted cash flow analysis. SBA servicing assets are included in “Other intangible assets” on the Consolidated Balance Sheets. SBA servicing assets are amortized against income over the lives of the related loans as a reduction of servicing fee income. 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.
Foreclosed Properties - Foreclosed properties consists primarily of real estate acquired by the Company through legal foreclosure or deed in lieu of foreclosure. The property is initially carried at the lower of cost or the estimated fair value of the property less estimated selling costs (also see Note 13). If there are subsequent declines in fair value, which is reviewed routinely by management, the property is written down to its fair value through a charge to expense. Capital expenditures made to improve the property are capitalized. Costs of holding real estate, such as property taxes, insurance and maintenance, less related revenues during the holding period, are recorded as expense as they are incurred.
Bank-owned life insurance - The Company has purchased life insurance policies on certain current and past key employees and directors where the insurance policy benefits and ownership are retained by the employer. These
policies are recorded at their cash surrender value. Income from these policies and changes in the net cash surrender value are recorded within noninterest income as “Bank-owned life insurance income.”
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence.
Other Investments - The Company accounts for substantially all of its investments in limited partnerships, limited liability companies (“LLCs”), and other privately held companies using the equity method of accounting. The accounting treatment depends upon the Company’s percentage ownership and degree of management influence.
Under the equity method of accounting, the Company records its initial investment at cost. Subsequently, the carrying amount of the investment is increased or decreased to reflect the Company’s share of income or loss of the investee. The Company’s recognition of earnings or losses from an equity method investment is based on the Company’s ownership percentage in the investee and the investee’s earnings on a quarterly basis. The investees generally provide their financial information during the quarter following the end of a given period. The Company’s policy is to record its share of earnings or losses on equity method investments in the quarter the financial information is received.
All of the Company’s investments in limited partnerships, LLCs, and other companies are privately held, and their market values are not readily available. The Company’s management evaluates its investments in investees for impairment based on the investee’s ability to generate cash through its operations or obtain alternative financing, and other subjective factors. There are inherent risks associated with the Company’s investments in such companies, which may result in income statement volatility in future periods.
At December 31, 2020 and 2019, the Company’s investments in limited partnerships, LLCs and other privately held companies totaled $7.8 million and $8.0 million, respectively, and are included in "Other assets".
Also see Note 3 for discussion of an investment without a readily determinable fair value.
Federal Home Loan Bank (FHLB) Stock - The Company is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors. FHLB stock is carried at cost and is recorded in "Other assets". Cash dividends are reported as income.
Federal Reserve Bank (FRB) Stock - The Company is a member of its regional Federal Reserve Bank and is required to own stock based on its level of capital. FRB stock is carried at cost and is recorded in "Other assets". Cash dividends are reported as income.
Loan Commitments and Related Financial Instruments - Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Stock-based Compensation - Restricted stock awards are the primary form of equity grant utilized by the Company. Compensation cost is based on the fair value of the award, which is the closing price of the Company's common stock on the date of the grant.
Restricted stock awards issued by the Company typically have vesting periods with service conditions. Compensation cost is recognized as expense over the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period. Because of the insignificant amount of forfeitures the Company has experienced, forfeitures are recognized as they occur.
Earnings Per Share Amounts - Basic Earnings Per Common Share is calculated by dividing net income, less income allocated to participating securities, by the weighted average number of common shares outstanding during the period, excluding unvested shares of restricted stock. For the Company, participating securities are comprised of unvested shares of restricted stock. Diluted Earnings Per Common Share is computed by assuming the issuance
of common shares for all potentially dilutive common shares outstanding during the reporting period. For the periods presented, the Company’s potentially dilutive common stock issuances related to unvested shares of restricted stock and stock option grants under the Company’s equity-based plans, as well as contingently issuable shares.
In computing Diluted Earnings Per Common Share, adjustments are made to the computation of Basic Earnings Per Common shares, as follows. As it relates to unvested shares of restricted stock, the number of shares added to the denominator is equal to the total number of weighted average unvested shares outstanding. As it relates to stock options, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is included in the calculation of dilutive securities. As it relates to contingently issuable shares, the number of shares that are included in the calculation of dilutive securities is based on the weighted average number of shares that would have been issuable if the end of the reporting period had been the end of the contingency period.
If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded.
Fair Value of Financial Instruments - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument, as more fully described in Note 13. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible assets and other assets such as deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Impairment - Goodwill is evaluated for impairment on at least an annual basis, and more often if a triggering event is identified, by comparing the estimated fair value of the reporting units to their related carrying value. At December 31, 2020, the Company had three reporting units - 1) First Bank with $227.6 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending
Division, with $4.3 million in goodwill. If the carrying value of a reporting unit exceeds its fair value, the Company determines whether the implied fair value of the goodwill, using various valuation techniques, exceeds the carrying value of the goodwill. If the carrying value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recorded in an amount equal to that excess.
The Company reviews all other long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s policy is that an impairment loss is recognized if the sum of the undiscounted future cash flows is less than the carrying amount of the asset. Any long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.
To date, the Company has not recorded any impairment write-downs of its long-lived assets or goodwill.
Comprehensive Income (Loss) - Comprehensive income (loss) is defined as the change in equity during a period for non-owner transactions and is divided into net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards.
Segment Reporting - Accounting standards require management to report selected financial and descriptive information about reportable operating segments that exceed certain thresholds. The standards also require related disclosures about products and services, geographic areas, and major customers. Generally, disclosures are required for segments internally identified to evaluate performance and resource allocation. The Company’s
operations are substantially all within a single banking segment, and the financial statements presented herein reflect the combined results of all of its operations with that segment. The Company has no foreign operations or customers.
Recent Accounting Pronouncements -
Accounting Standards Adopted in 2020
In January 2017, the FASB amended the Goodwill and Other Intangibles topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test in which an entity performs a hypothetical purchase price allocation to determine the amount of impairment. The amount of goodwill impairment under this amendment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections were effective for the Company on January 1, 2020 and the adoption of this amendment did not have a material effect on the Company's financial statements.
In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements. The amendments were effective on January 1, 2020. These amendments did not have a material effect on the Company's financial statements.
In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments were effective for the Company on January 1, 2020 and their adoption did not have a material effect on its financial statements.
Accounting Standards Pending Adoption
In June 2016, the FASB issued guidance to change the accounting for credit losses. The guidance requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit losses" and record an allowance that, when deducted from the amortized cost basis of the financial assets, presents the net amount expected to be collected on the financial assets. In May 2019, the FASB issued additional guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of the CECL model. The Company does not expect to elect this option. The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts. As originally provided for in the CECL standard, the Company would have applied the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, which, for the Company, was January 1, 2020, with future adjustments to credit loss expectations recorded through the income statement as charges or credits to earnings. In the first quarter of 2020, in response to the COVID-19 pandemic, the CARES Act was enacted by the United States Congress and signed by the President. The CARES Act included an election to defer the implementation of CECL until the earlier of the cessation of the national emergency or December 31, 2020. Due primarily to the challenges associated with developing a reliable forecast of losses that may result from the unprecedented pandemic, the Company elected to opt-in to this deferral option. In December 2020, the United States Congress extended several provisions of the CARES Act, including the option to further defer implementation of CECL until January 1, 2022. The Company currently expects to adopt CECL as of January 1, 2021. Upon the adoption of CECL, the Company expects its allowance for credit losses related to all financial assets will increase by approximately $12-$14 million and its reserve for unfunded commitments will increase by $6-$7 million. As noted above, this initial impact will be reflected as a cumulative-effect adjustment to retained earnings.
In August 2018, the FASB amended the Compensation - Retirement Benefits - Defined Benefit Plans Topic of the Accounting Standards Codification to improve disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans. The guidance removes disclosures that are no longer considered cost-beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant.
The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company does not expect these amendments to have a
material effect on its financial statements.
In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in accounting for LIBOR reference rate reform. The amendments are effective as of March 12, 2020 through December 31, 2022. The Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 2. Acquisition
On September 1, 2020, the Company completed the acquisition of Magnolia Financial, Inc., a business financing company headquartered in Spartanburg, South Carolina, that makes loans throughout the southeastern United States. In the transaction, the Company acquired $14.6 million in loans and $0.5 million of other assets, and assumed $11.7 million in borrowings, substantially all of which was paid off subsequent to the closing. The transaction value was approximately $10.0 million with the Company paying $9.5 million in cash and issuing 24,096 shares of its common stock, which had a value of approximately $0.5 million.
This acquisition was accounted for using the acquisition method of accounting for business combinations, and accordingly, the assets and liabilities of the financing company were recorded based on fair values, which according to applicable accounting guidance, are subject to change for twelve months following the acquisition. In connection with this transaction, the Company recorded goodwill of $4.9 million and $1.6 million in other amortizable intangible assets, all of which are deductible for tax purposes over 15 years.
Note 3. Securities
The book values and approximate fair values of investment securities at December 31, 2020 and 2019 are summarized as follows:
2020 2019
Amortized
Cost Fair
Value Unrealized Amortized
Cost Fair
Value Unrealized
($ in thousands) Gains (Losses) Gains (Losses)
Securities available for sale:
Government-sponsored enterprise securities
$ 70,016 70,206 371 (181) 20,000 20,009 17 (8)
Mortgage-backed securities
1,318,998 1,337,706 20,832 (2,124) 758,491 767,285 9,463 (669)
Corporate bonds
43,670 45,220 1,760 (210) 33,711 34,651 1,025 (85)
Total available for sale
1,432,684 1,453,132 22,963 (2,515) 812,202 821,945 10,505 (762)
Securities held to maturity:
Mortgage-backed securities
29,959 30,900 941 - 41,423 41,542 125 (6)
State and local governments
137,592 139,834 2,407 (165) 26,509 26,791 285 (3)
Total held to maturity
$ 167,551 170,734 3,348 (165) 67,932 68,333 410 (9)
All of the Company’s mortgage-backed securities were issued by government-sponsored corporations, except for private mortgage-backed securities with a fair value of $1.0 million and $1.1 million as of December 31, 2020 and 2019, respectively.
The following table presents information regarding securities with unrealized losses at December 31, 2020:
($ in thousands) Securities in an Unrealized
Loss Position for
Less than 12 Months Securities in an Unrealized
Loss Position for
More than 12 Months Total
Fair Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses
Government-sponsored enterprise securities
$ 29,812 181 - - 29,812 181
Mortgage-backed securities
497,992 1,957 6,168 167 504,160 2,124
Corporate bonds
3,956 45 835 165 4,791 210
State and local governments
23,310 165 - - 23,310 165
Total temporarily impaired securities
$ 555,070 2,348 7,003 332 562,073 2,680
The following table presents information regarding securities with unrealized losses at December 31, 2019:
($ in thousands) Securities in an Unrealized
Loss Position for
Less than 12 Months Securities in an Unrealized
Loss Position for
More than 12 Months Total
Fair Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses
Government-sponsored enterprise securities
$ 4,992 8 - - 4,992 8
Mortgage-backed securities
77,274 293 50,851 382 128,125 675
Corporate bonds
- - 915 85 915 85
State and local governments
- - 934 3 934 3
Total temporarily impaired securities
$ 82,266 301 52,700 470 134,966 771
In the above tables, all of the securities that were in an unrealized loss position at December 31, 2020 and 2019 are bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. The Company evaluated the collectability of each of these bonds and concluded that there was no other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.
As of December 31, 2020 and December 31, 2019, the Company's security portfolio held 69 and 54 securities that were in an unrealized loss position, respectively. The majority of unrealized losses are related to the Company's mortgage-backed securities.
The book values and approximate fair values of investment securities at December 31, 2020, 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.
Securities Available for Sale Securities Held to Maturity
($ in thousands) Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Debt securities
Due within one year $ - - $ 2,087 2,101
Due after one year but within five years 28,670 30,265 2,915 3,008
Due after five years but within ten years 74,016 74,400 3,418 3,536
Due after ten years 11,000 10,761 129,172 131,189
Mortgage-backed securities 1,318,998 1,337,706 29,959 30,900
Total securities $ 1,432,684 1,453,132 $ 167,551 170,734
At December 31, 2020 and 2019, investment securities with carrying values of $630,303,000 and $260,826,000, respectively, were pledged as collateral for public deposits.
In 2020, the Company received proceeds from sales of securities of $219,697,000 and recorded $8,024,000 in gross gains from the sales. In 2019, the Company received proceeds from sales of securities of $39,797,000 and recorded $97,000 in gross gains from the sales. The Company sold no securities in 2018.
Included in “other assets” in the Consolidated Balance Sheets are investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”) stock totaling $23,526,000 and $33,380,000 at December 31, 2020 and 2019, respectively. These investments do not have readily determinable fair values. The FHLB stock had a cost and fair value of $5,855,000 and $15,789,000 at December 31, 2020 and 2019, respectively, and serves as part of the collateral for the Company’s line of credit with the FHLB and is also a requirement for membership in the FHLB system. The FRB stock had a cost and fair value of $17,671,000 and $17,591,000 at December 31, 2020 and 2019, respectively, and is a requirement for FRB member bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.
The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against Visa, to which the Company is not a party. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at December 31, 2020 was approximately 1.62, which means the Company would receive approximately 20,051 Class A shares if the stock had converted on that date. This Class B stock does not have a readily determinable fair value and is carried at zero. If a readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a credit to earnings.
Note 4. Loans and Asset Quality Information
The following is a summary of the major categories of total loans outstanding:
($ in thousands) December 31, 2020 December 31, 2019
Amount Percentage Amount Percentage
All loans:
Commercial, financial, and agricultural
$ 782,549 17 % $ 504,271 11 %
Real estate - construction, land development & other land loans
570,672 12 % 530,866 12 %
Real estate - mortgage - residential (1-4 family) first mortgages
972,378 21 % 1,105,014 25 %
Real estate - mortgage - home equity loans / lines of credit
306,256 6 % 337,922 8 %
Real estate - mortgage - commercial and other
2,049,203 43 % 1,917,280 43 %
Consumer loans 53,955 1 % 56,172 1 %
Subtotal
4,735,013 100 % 4,451,525 100 %
Unamortized net deferred loan costs (fees)
(3,698) 1,941
Total loans
$ 4,731,315 $ 4,453,466
Included within "Commercial, financial and agricultural" in the table above are PPP loans totaling $240.5 million. PPP loans are fully guaranteed by the SBA. Included in unamortized net deferred loan fees are $6.0 million in unamortized net deferred loan fees associated with PPP loans. These fees are being amortized under the effective interest method over the terms of the loans. Accelerated amortization is recorded in the periods in which principal amounts are forgiven in accordance with the terms of the program. Because of their fully guaranteed nature, the Company has no allocation of allowance for loan losses established for these loans.
Also included in the table above are various non-PPP SBA loans, with additional information on these loans presented in the table below.
($ in thousands) December 31,
2020 December 31,
Guaranteed portions of non-PPP SBA Loans included in table above $ 33,959 54,400
Unguaranteed portions of SBA Loans included in table above 135,703 110,782
Total non-PPP SBA loans included in the table above $ 169,662 165,182
Sold portions of SBA loans with servicing retained - not included in table above $ 395,398 316,730
At December 31, 2020 and 2019, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to $7.3 million and $7.1 million, respectively. The discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform.
Loans in the amount of $4.0 billion were pledged as collateral for certain borrowings at both December 31, 2020 and December 31, 2019, respectively (see Note 9).
Included in the table above are credit card balances outstanding totaling $33.2 million and $30.9 million at December 31, 2020 and 2019, respectively.
The loans above also include loans to executive officers and directors serving the Company at December 31, 2020 and to their associates, totaling approximately $3.6 million and $5.3 million at December 31, 2020 and 2019, respectively. New loans and advances on those loans in 2020 totaled $2.2 million and repayments amounted to $3.9 million. Management does not believe these loans involve more than the normal risk of collectability or present other unfavorable features.
The Company has several acquired loan portfolios as a result of merger and acquisition transactions. In these transactions, the Company recorded loans at their fair value as required by applicable accounting guidance. Included in these loan portfolios were purchased credit impaired (“PCI”) loans, which are loans for which it is probable at acquisition date that all contractually required payments will not be collected. The remaining loans were considered to be purchased non-impaired loans and their related fair value discount or premium is being recognized as an adjustment to yield over the remaining life of each loan.
As of December 31, 2020, 2019 and 2018, there was a remaining accretable discount of $7.9 million, $11.1 million, and $15.0 million, respectively, related to purchased non-impaired loans. The discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform.
The following table presents changes in the carrying value of PCI loans.
($ in thousands)
Purchased Credit Impaired Loans
For the Year Ended December 31,
2020 For the Year Ended December 31,
2019 For the Year Ended December 31,
Balance at beginning of period $ 12,664 17,393 23,165
Change due to payments received and accretion (4,087) (4,863) (5,799)
Change due to loan charge-offs (13) (11) (4)
Transfers to foreclosed real estate - - (10)
Other 27 145 41
Balance at end of period $ 8,591 12,664 17,393
The following table presents changes in the accretable yield for PCI loans.
($ in thousands)
Accretable Yield for PCI loans
For the Year Ended December 31,
2020 For the Year Ended December 31,
2019 For the Year Ended December 31,
Balance at beginning of period
$ 4,149 4,750 4,688
Accretion
(1,119) (1,486) (2,050)
Reclassification from (to) nonaccretable difference
413 617 849
Other, net
(545) 268 1,263
Balance at end of period
$ 2,898 4,149 4,750
During 2020, the Company received $500,000 in payments that exceeded the carrying amount of the related PCI loans, of which $397,000 was recognized as loan discount accretion income, $89,000 was recorded as additional loan interest income, and $14,000 was recorded as a recovery. During 2019, the Company received $406,000 in payments that exceeded the carrying amount of the related PCI loans, of which $348,000 was recognized as loan discount accretion income and $58,000 was recorded as additional loan interest income. During 2018, the Company received $772,000 in payments that exceeded the carrying amount of the related PCI loans, of which $493,000 was recognized as loan discount accretion income and $279,000 was recorded as additional loan interest income.
Nonperforming assets are defined as nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows:
ASSET QUALITY DATA ($ in thousands)
December 31,
2020 December 31,
Nonperforming assets
Nonaccrual loans $ 35,076 24,866
Restructured loans - accruing 9,497 9,053
Accruing loans > 90 days past due - -
Total nonperforming loans 44,573 33,919
Foreclosed properties 2,424 3,873
Total nonperforming assets $ 46,997 37,792
Purchased credit impaired loans not included above (1) $ 8,591 12,664
(1) In the March 3, 2017 acquisition of Carolina Bank. and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.7 million and $0.8 million in PCI loans at December 31, 2020 and 2019, respectively, that are contractually past due 90 days or more.
At December 31, 2020 and 2019, the Company had $1.9 million and $0.6 million in residential mortgage loans in process of foreclosure, respectively.
At December 31, 2020 and 2019, there were no commitments to lend additional funds to debtors whose loans were nonperforming.
The following is a summary the Company’s nonaccrual loans by major categories.
($ in thousands) December 31,
2020 December 31,
Commercial, financial, and agricultural
$ 9,681 5,518
Real estate - construction, land development & other land loans
643 1,067
Real estate - mortgage - residential (1-4 family) first mortgages
6,048 7,552
Real estate - mortgage - home equity loans / lines of credit
1,333 1,797
Real estate - mortgage - commercial and other
17,191 8,820
Consumer loans 180 112
Total $ 35,076 24,866
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2020.
($ in thousands) Accruing
30-59 Days
Past Due Accruing 60-
89 Days
Past Due Accruing 90
Days or More
Past Due Nonaccrual
Loans Accruing
Current Total Loans
Receivable
Commercial, financial, and agricultural
$ 1,464 1,101 - 9,681 770,166 782,412
Real estate - construction, land development & other land loans
572 - - 643 569,307 570,522
Real estate - mortgage - residential (1-4 family) first mortgages
10,146 869 - 6,048 951,088 968,151
Real estate - mortgage - home equity loans / lines of credit
1,088 42 - 1,333 303,693 306,156
Real estate - mortgage - commercial and other
2,540 3,111 - 17,191 2,022,422 2,045,264
Consumer loans 180 36 - 180 53,521 53,917
Purchased credit impaired
328 112 719 - 7,432 8,591
Total $ 16,318 5,271 719 35,076 4,677,629 4,735,013
Unamortized net deferred loan (fees) costs (3,698)
Total loans $ 4,731,315
The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2019.
($ in thousands) Accruing
30-59 Days
Past Due Accruing 60-
89 Days
Past Due Accruing 90
Days or More
Past Due Nonaccrual
Loans Accruing
Current Total Loans
Receivable
Commercial, financial, and agricultural
$ 752 - - 5,518 497,788 504,058
Real estate - construction, land development & other land loans
37 152 - 1,067 529,444 530,700
Real estate - mortgage - residential (1-4 family) first mortgages
10,858 5,056 - 7,552 1,076,205 1,099,671
Real estate - mortgage - home equity loans / lines of credit
770 300 - 1,797 334,832 337,699
Real estate - mortgage - commercial and other
4,257 - - 8,820 1,897,573 1,910,650
Consumer loans 344 137 - 112 55,490 56,083
Purchased credit impaired
218 38 762 - 11,646 12,664
Total $ 17,236 5,683 762 24,866 4,402,978 4,451,525
Unamortized net deferred loan (fees) costs 1,941
Total loans $ 4,453,466
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2020.
($ in thousands) Commercial,
Financial, and
Agricultural Real Estate -
Construction,
Land
Development
& Other Land
Loans Real Estate -
Residential
(1-4 Family)
First
Mortgages Real Estate
- Mortgage
- Home
Equity Lines
of Credit Real Estate
- Mortgage
-
Commercial
and Other Consumer loans Unallocated Total
As of and for the year ended December 31, 2020
Beginning balance
$ 4,553 1,976 3,832 1,127 8,938 972 - 21,398
Charge-offs
(5,608) (51) (478) (524) (968) (873) - (8,502)
Recoveries
745 1,552 754 487 621 294 - 4,453
Provisions
11,626 1,878 3,940 1,285 15,012 1,085 213 35,039
Ending balance
$ 11,316 5,355 8,048 2,375 23,603 1,478 213 52,388
Ending balances as of December 31, 2020: Allowance for loan losses
Individually evaluated for impairment
$ 3,546 30 800 - 2,175 - - 6,551
Collectively evaluated for impairment
$ 7,742 5,325 7,141 2,375 21,428 1,475 213 45,699
Purchased credit impaired
$ 28 - 107 - - 3 - 138
Loans receivable as of December 31, 2020:
Ending balance - total
$ 782,549 570,672 972,378 306,256 2,049,203 53,955 - 4,735,013
Unamortized net deferred loan (fees) costs (3,698)
Total loans
$ 4,731,315
Ending balances as of December 31, 2020: Loans
Individually evaluated for impairment
$ 7,700 677 9,303 15 18,582 4 - 36,281
Collectively evaluated for impairment
$ 774,712 569,845 958,848 306,141 2,026,682 53,913 - 4,690,141
Purchased credit impaired
$ 137 150 4,227 100 3,939 38 - 8,591
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2019.
($ in thousands) Commercial,
Financial, and
Agricultural Real Estate -
Construction,
Land
Development
& Other Land
Loans Real Estate -
Residential
(1-4 Family)
First
Mortgages Real Estate
- Mortgage
- Home
Equity Lines
of Credit Real Estate
- Mortgage
-
Commercial
and Other Consumer loans Unallocated Total
As of and for the year ended December 31, 2019
Beginning balance
$ 2,889 2,243 5,197 1,665 7,983 952 110 21,039
Charge-offs
(2,473) (553) (657) (307) (1,556) (757) - (6,303)
Recoveries
980 1,275 705 629 575 235 - 4,399
Provisions
3,157 (989) (1,413) (860) 1,936 542 (110) 2,263
Ending balance
$ 4,553 1,976 3,832 1,127 8,938 972 - 21,398
Ending balances as of December 31, 2019: Allowance for loan losses
Individually evaluated for impairment
$ 1,791 50 750 - 983 - - 3,574
Collectively evaluated for impairment
$ 2,720 1,926 2,976 1,127 7,931 961 - 17,641
Purchased credit impaired
$ 42 - 106 - 24 11 - 183
Loans receivable as of December 31, 2019:
Ending balance - total
$ 504,271 530,866 1,105,014 337,922 1,917,280 56,172 - 4,451,525
Unamortized net deferred loan (fees) costs 1,941
Total loans
$ 4,453,466
Ending balances as of December 31, 2019: Loans
Individually evaluated for impairment
$ 4,957 796 9,546 333 9,570 - - 25,202
Collectively evaluated for impairment
$ 499,101 529,904 1,090,125 337,366 1,901,080 56,083 - 4,413,659
Purchased credit impaired
$ 213 166 5,343 223 6,630 89 - 12,664
The following table presents the activity in the allowance for loan losses for the year ended December 31, 2018.
($ in thousands) Commercial,
Financial, and
Agricultural Real Estate -
Construction,
Land
Development
& Other Land
Loans Real Estate
-
Residential
(1-4 Family)
First
Mortgages Real Estate
- Mortgage
- Home
Equity Lines
of Credit Real Estate
- Mortgage
-
Commercial
and Other Consumer loans Unallo-
cated Total
As of and for the year ended December 31, 2018
Beginning balance
$ 3,111 2,816 6,147 1,827 6,475 950 1,972 23,298
Charge-offs
(2,128) (158) (1,734) (711) (1,459) (781) - (6,971)
Recoveries
1,195 4,097 833 364 1,503 309 - 8,301
Provisions
711 (4,512) (49) 185 1,464 474 (1,862) (3,589)
Ending balance
$ 2,889 2,243 5,197 1,665 7,983 952 110 21,039
Ending balances as of December 31, 2018: Allowance for loan losses
Individually evaluated for impairment
$ 226 134 955 48 906 - - 2,269
Collectively evaluated for impairment
$ 2,661 2,109 4,143 1,608 7,070 941 110 18,642
Purchased credit impaired
$ 2 - 99 9 7 11 - 128
Loans receivable as of December 31, 2018:
Ending balance - total
$ 457,037 518,976 1,054,176 359,162 1,787,022 71,392 - 4,247,765
Unamortized net deferred loan (fees) costs 1,299
Total loans
4,249,064
Ending balances as of December 31, 2018: Loans
Individually evaluated for impairment
$ 696 1,345 12,391 296 9,525 - - 24,253
Collectively evaluated for impairment
$ 456,111 517,453 1,035,532 358,522 1,767,361 71,140 - 4,206,119
Purchased credit impaired
$ 230 178 6,253 344 10,136 252 - 17,393
The following table presents loans individually evaluated for impairment by class of loans, excluding purchased credit impaired loans, as of December 31, 2020.
($ in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment
Impaired loans with no related allowance recorded:
Commercial, financial, and agricultural
$ 3,688 4,325 - 750
Real estate - mortgage - construction, land development & other land loans
554 694 - 308
Real estate - mortgage - residential (1-4 family) first mortgages
4,115 4,456 - 4,447
Real estate - mortgage -home equity loans / lines of credit
15 27 - 264
Real estate - mortgage -commercial and other
11,763 13,107 - 9,026
Consumer loans 4 4 - 1
Total impaired loans with no allowance
$ 20,139 22,613 - 14,796
Impaired loans with an allowance recorded:
Commercial, financial, and agricultural
$ 4,012 4,398 3,546 5,139
Real estate - mortgage - construction, land development & other land loans
123 131 30 502
Real estate - mortgage - residential (1-4 family) first mortgages
5,188 5,361 800 5,186
Real estate - mortgage -home equity loans / lines of credit
- - - 21
Real estate - mortgage -commercial and other
6,819 7,552 2,175 5,786
Consumer loans - - - -
Total impaired loans with allowance
$ 16,142 17,442 6,551 16,634
Interest income recorded on impaired loans during the year ended December 31, 2020 was $1.1 million, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing TDRs.
The following table presents loans individually evaluated for impairment by class of loans, excluding purchased credit impaired loans, as of December 31, 2019.
($ in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment
Impaired loans with no related allowance recorded:
Commercial, financial, and agricultural
$ 16 19 - 74
Real estate - mortgage - construction, land development & other land loans
221 263 - 366
Real estate - mortgage - residential (1-4 family) first mortgages
4,300 4,539 - 4,415
Real estate - mortgage -home equity loans / lines of credit
333 357 - 147
Real estate - mortgage -commercial and other
2,643 3,328 - 3,240
Consumer loans - - - -
Total impaired loans with no allowance
$ 7,513 8,506 - 8,242
Impaired loans with an allowance recorded:
Commercial, financial, and agricultural
$ 4,941 4,995 1,791 1,681
Real estate - mortgage - construction, land development & other land loans
575 575 50 586
Real estate - mortgage - residential (1-4 family) first mortgages
5,246 5,469 750 6,206
Real estate - mortgage -home equity loans / lines of credit
- - - 55
Real estate - mortgage -commercial and other
6,927 7,914 983 5,136
Consumer loans - - - -
Total impaired loans with allowance
$ 17,689 18,953 3,574 13,664
Interest income recorded on impaired loans during the year ended December 31, 2019 was $1.3 million, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing TDRs.
The following table presents loans individually evaluated for impairment by class of loans, excluding purchased credit impaired loans, as of December 31, 2018.
($ in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment
Impaired loans with no related allowance recorded:
Commercial, financial, and agricultural
$ 310 310 - 957
Real estate - mortgage - construction, land development & other land loans
485 803 - 2,366
Real estate - mortgage - residential (1-4 family) first mortgages
4,626 4,948 - 4,804
Real estate - mortgage -home equity loans / lines of credit
22 31 - 91
Real estate - mortgage -commercial and other
3,475 4,237 - 3,670
Consumer loans - - - -
Total impaired loans with no allowance
$ 8,918 10,329 - 11,888
Impaired loans with an allowance recorded:
Commercial, financial, and agricultural
$ 386 387 226 422
Real estate - mortgage - construction, land development & other land loans
860 864 134 385
Real estate - mortgage - residential (1-4 family) first mortgages
7,765 7,904 955 8,963
Real estate - mortgage -home equity loans / lines of credit
274 275 48 184
Real estate - mortgage -commercial and other
6,050 6,054 906 5,911
Consumer loans - - - 2
Total impaired loans with allowance
$ 15,335 15,484 2,269 15,867
Interest income recorded on impaired loans during the year ended December 31, 2018 was $1.5 million, and reflects interest income recorded on nonaccrual loans prior to them being placed on nonaccrual status and interest income recorded on accruing TDRs.
The Company tracks credit quality based on its internal risk ratings. Upon origination a loan is assigned an initial risk grade, which is generally based on several factors such as the borrower’s credit score, the loan-to-value ratio, the debt-to-income ratio, etc. Loans that are risk-graded as substandard during the origination process are declined. After loans are initially graded, they are monitored regularly for credit quality based on many factors, such as payment history, the borrower’s financial status, and changes in collateral value. Loans can be downgraded or upgraded depending on management’s evaluation of these factors. Internal risk-grading policies are consistent throughout each loan type.
The following describes the Company’s internal risk grades in ascending order of likelihood of loss:
Risk Grade Description
Pass:
1 Loans with virtually no risk, including cash secured loans.
2 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.
3 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.
4 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.
5 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.
P
(Pass) Consumer loans (<$500,000) that are of satisfactory credit quality with borrowers who exhibit good personal credit history, average personal financial strength and moderate debt levels. These loans generally conform to Bank policy, but may include approved mitigated exceptions to the guidelines.
Special Mention:
6 Existing loans with defined weaknesses in primary source of repayment that, if not corrected, could cause a loss to the Bank.
Classified:
7 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.
8 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.
9 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.
F
(Fail) Consumer loans (<$500,000) with a well-defined weakness, such as exceptions of any kind with no mitigating factors, history of paying outside the terms of the note, insufficient income to support the current level of debt, etc.
The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2020.
($ in thousands) Pass Special Mention
Loans Classified
Accruing Loans Classified
Nonaccrual
Loans Total
Commercial, financial, and agricultural
$ 762,091 9,553 1,087 9,681 782,412
Real estate - construction, land development & other land loans
560,845 7,877 1,157 643 570,522
Real estate - mortgage - residential (1-4 family) first mortgages
943,455 7,609 11,039 6,048 968,151
Real estate - mortgage - home equity loans / lines of credit
297,795 1,468 5,560 1,333 306,156
Real estate - mortgage - commercial and other
1,988,684 34,588 4,801 17,191 2,045,264
Consumer loans 53,488 80 169 180 53,917
Purchased credit impaired
6,901 85 1,605 - 8,591
Total
$ 4,613,259 61,260 25,418 35,076 4,735,013
Unamortized net deferred loan (fees) costs (3,698)
Total loans
4,731,315
The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2019.
($ in thousands) Pass Special Mention
Loans Classified
Accruing Loans Classified
Nonaccrual
Loans Total
Commercial, financial, and agricultural
$ 486,081 7,998 4,461 5,518 504,058
Real estate - construction, land development & other land loans
522,767 4,075 2,791 1,067 530,700
Real estate - mortgage - residential (1-4 family) first mortgages
1,063,735 13,187 15,197 7,552 1,099,671
Real estate - mortgage - home equity loans / lines of credit
328,903 1,258 5,741 1,797 337,699
Real estate - mortgage - commercial and other
1,873,594 20,800 7,436 8,820 1,910,650
Consumer loans 55,203 413 355 112 56,083
Purchased credit impaired
8,098 2,590 1,976 - 12,664
Total
$ 4,338,381 50,321 37,957 24,866 4,451,525
Unamortized net deferred loan (fees) costs 1,941
Total loans
4,453,466
Troubled Debt Restructurings
The restructuring of a loan is considered a “troubled debt restructuring” ("TDR") if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, extension of terms and other actions intended to minimize potential losses. As previously discussed, under the CARES Act and banking regulator guidance, which the Company has applied, modifications deemed to be COVID-19-related are not considered a TDR if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. In December 2020, this provision was extended to December 31, 2021. The Company's COVID-19 payment deferral program began in late-March 2020, with the payment deferrals limited to 90 days and deferrals were granted to substantially all borrowers who requested it. As the initial 90 day deferrals began to expire, the Company approved subsequent deferral requests of another 90 days based on the circumstances of each borrower. Most of the Company's borrowers who were granted payment deferrals began making payments again in the second half of 2020. As of December 31, 2020, the Company had payment deferrals for 38 loans with an aggregate loan balance of $16.6 million, which are not included in the TDR's disclosed in this report. The Company continues to accrue interest on these loans during the deferral period.
The vast majority of the Company’s TDRs modified during the years ended December 31, 2020, 2019, and 2018 related to interest rate reductions combined with extension of terms. The Company does not generally grant principal forgiveness.
All loans classified as TDRs are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company’s TDRs can be classified as either nonaccrual or accruing based on the loan’s payment status. The TDRs that are nonaccrual are reported within the nonaccrual loan totals presented previously.
The following table presents information related to loans modified in a TDR during the year ended December 31, 2020.
($ in thousands) For the year ended December 31, 2020
Number of
Contracts Pre-
Modification
Restructured
Balances Post-
Modification
Restructured
Balances
TDRs - Accruing
Commercial, financial, and agricultural
2 $ 143 $ 143
Real estate - construction, land development & other land loans
1 67 67
Real estate - mortgage - residential (1-4 family) first mortgages
2 75 78
Real estate - mortgage - home equity loans / lines of credit
- - -
Real estate - mortgage - commercial and other
- - -
Consumer loans 1 4 4
TDRs - Nonaccrual
Commercial, financial, and agricultural
1 72 72
Real estate - construction, land development & other land loans
- - -
Real estate - mortgage - residential (1-4 family) first mortgages
- - -
Real estate - mortgage - home equity loans / lines of credit
- - -
Real estate - mortgage - commercial and other
5 5,977 5,977
Consumer loans - - -
Total TDRs arising during period
12 $ 6,338 $ 6,341
The following table presents information related to loans modified in a TDR during the year ended December 31, 2019.
($ in thousands) For the year ended December 31, 2019
Number of
Contracts Pre-
Modification
Restructured
Balances Post-
Modification
Restructured
Balances
TDRs - Accruing
Commercial, financial, and agricultural
2 $ 395 $ 395
Real estate - construction, land development & other land loans
- - -
Real estate - mortgage - residential (1-4 family) first mortgages
3 387 391
Real estate - mortgage - home equity loans / lines of credit
- - -
Real estate - mortgage - commercial and other
1 274 274
Consumer loans - - -
TDRs - Nonaccrual
Commercial, financial, and agricultural
- - -
Real estate - construction, land development & other land loans
- - -
Real estate - mortgage - residential (1-4 family) first mortgages
- - -
Real estate - mortgage - home equity loans / lines of credit
- - -
Real estate - mortgage - commercial and other
- - -
Consumer loans - - -
Total TDRs arising during period
6 $ 1,056 $ 1,060
The following table presents information related to loans modified in a TDR during the year ended December 31, 2018.
($ in thousands) For the year ended December 31, 2018
Number of
Contracts Pre-
Modification
Restructured
Balances Post-
Modification
Restructured
Balances
TDRs - Accruing
Commercial, financial, and agricultural
- $ - $ -
Real estate - construction, land development & other land loans
- - -
Real estate - mortgage - residential (1-4 family) first mortgages
2 254 273
Real estate - mortgage - home equity loans / lines of credit
- - -
Real estate - mortgage - commercial and other
- - -
Consumer loans - - -
TDRs - Nonaccrual
Commercial, financial, and agricultural
- - -
Real estate - construction, land development & other land loans
1 61 61
Real estate - mortgage - residential (1-4 family) first mortgages
3 340 350
Real estate - mortgage - home equity loans / lines of credit
- - -
Real estate - mortgage - commercial and other
- - -
Consumer loans - - -
Total TDRs arising during period
6 $ 655 $ 684
Accruing TDRs that were modified in the previous 12 months and that defaulted during the years ended December 31, 2020, 2019, and 2018 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.
($ in thousands) For the Year Ended December 31, 2020 For the Year Ended December 31, 2019 For the Year Ended December 31, 2018
Number of
Contracts Recorded
Investment Number of
Contracts Recorded
Investment Number of
Contracts Recorded
Investment
Accruing TDRs that subsequently defaulted
Real estate - mortgage - residential (1-4 family first mortgages)
- $ - 1 $ 93 1 $ 60
Real estate - mortgage - commercial and other
1 274 - - 3 1,333
Total accruing TDRs that subsequently defaulted
1 $ 274 1 $ 93 4 $ 1,393
Note 5. Premises and Equipment
Premises and equipment at December 31, 2020 and 2019 consisted of the following:
($ in thousands) 2020 2019
Land $ 38,584 38,164
Buildings 103,232 93,738
Furniture and equipment 30,097 33,110
Leasehold improvements 3,054 2,195
Total cost 174,967 167,207
Less accumulated depreciation and amortization (54,465) (52,348)
Total premises and equipment $ 120,502 114,859
Note 6. Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of December 31, 2020 and December 31, 2019 and the carrying amount of unamortizable intangible assets as of those same dates.
December 31, 2020 December 31, 2019
($ in thousands) Gross Carrying
Amount Accumulated
Amortization Gross Carrying
Amount Accumulated
Amortization
Amortizable intangible assets:
Customer lists $ 7,613 2,814 6,013 2,185
Core deposit intangibles 28,440 23,832 28,440 20,610
SBA servicing asset 9,976 4,188 7,776 2,393
Other 1,403 1,232 1,303 1,127
Total $ 47,432 32,066 43,532 26,315
Unamortizable intangible assets:
Goodwill $ 239,272 234,368
SBA servicing assets are recorded for the portions of SBA loans that the Company has sold but continue to service for a fee. Servicing assets are initially recorded at fair value and amortized over the expected lives of the related loans and are tested for impairment on a quarterly basis. SBA servicing asset amortization expense is recorded within noninterest income as an offset to SBA servicing fees within the line item "Other service charges, commissions, and fees." As derived from the table above, the Company had a SBA servicing asset at December 31, 2020 with a remaining book value of $5,788,000. The Company recorded $2,200,000 and $2,304,000 in servicing assets associated with the guaranteed portion of SBA loans sold during 2020 and 2019, respectively. During 2020, 2019, and 2018, the Company recorded $1,795,000, $1,340,000, and $846,000, respectively, in related amortization expense. At December 31, 2020 and 2019, the Company serviced for others SBA loans totaling $395.4 million and $316.7 million, respectively.
In connection with the September 1, 2020 acquisition of a business financing company, the Company recorded goodwill of $4.9 million and $1.6 million in other amortizable intangible assets, each of which is deductible for tax purposes over 15 years. See Note 2 for additional discussion of this acquisition.
Amortization expense of all other intangible assets, excluding the SBA servicing asset, totaled $3,956,000, $4,858,000 and $5,917,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
Goodwill is evaluated for impairment on at least an annual basis, with the annual evaluation occurring on October 31 of each year - see Note 1 for additional discussion. The annual reviews in October 2018 and October 2019, which were primarily of a qualitative nature, indicated that none of the Company's goodwill was impaired. The onset of the COVID-19 pandemic in March 2020 resulted in economic turmoil and market volatility that resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decreases were triggering indicators requiring indicating the need for interim analysis. Accordingly, during each quarter of 2020, the Company reviewed its goodwill for impairment. For the first and third quarters of 2020, the Company performed an interim step-one goodwill impairment quantitative analysis. For the second quarter of 2020
and the annual fourth quarter 2020 review, management reviewed its goodwill for impairment primarily qualitatively by reviewing the factors and assumptions used in the analysis for the preceding quarter. The conclusion of each 2020 review was that none of the Company's goodwill was impaired.
The following table presents the estimated amortization expense schedule related to acquisition-related amortizable intangible assets for each of the five calendar years ending December 31, 2025 and the estimated amount amortizable thereafter. These amounts will be recorded as "Intangibles amortization expense" within the noninterest expense section of the Consolidated Statements of Income. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortizable intangible assets.
($ in thousands) Estimated
Amortization Expense
2021 $ 3,272
2022 2,367
2023 1,386
2024 741
2025 562
Thereafter 1,250
Total $ 9,578
Note 7. Income Taxes
The components of income tax expense for the years ended December 31, 2020, 2019, and 2018 are as follows:
($ in thousands) 2020 2019 2018
Current - Federal $ 27,799 19,920 19,188
- State 3,909 2,499 3,187
Deferred - Federal (8,893) 1,572 1,658
- State (1,161) 239 156
Total
$ 21,654 24,230 24,189
The sources and tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) at December 31, 2020 and 2019 are presented below:
($ in thousands) 2020 2019
Deferred tax assets:
Allowance for loan losses
$ 12,031 4,916
Excess book over tax pension plan cost
367 241
Deferred compensation
257 293
Federal & state net operating loss and tax credit carryforwards
282 376
Accruals, book versus tax
3,232 2,833
Pension liability adjustments
418 710
Foreclosed real estate
123 87
Basis differences in assets acquired in FDIC transactions
647 416
Equity compensation 661 370
Partnership investments
258 254
Leases 120 -
SBA servicing asset
358 400
All other
3 3
Gross deferred tax assets
18,757 10,899
Less: Valuation allowance
(14) (40)
Net deferred tax assets
18,743 10,859
Deferred tax liabilities:
Loan fees
(1,011) (2,428)
Depreciable basis of fixed assets
(4,809) (4,995)
Amortizable basis of intangible assets
(7,965) (7,844)
FHLB stock dividends
(236) (472)
Trust preferred securities
(473) (548)
Purchase accounting adjustments
- (84)
Unrealized gain on securities available for sale
(4,699) (2,239)
Gross deferred tax liabilities
(19,193) (18,610)
Net deferred tax liability - included in other liabilities
$ (450) (7,751)
A portion of the annual change in the net deferred tax asset relates to unrealized gains and losses on securities available for sale. The related 2020 and 2019 deferred tax expense (benefit) of approximately $2,460,000 and $5,135,000 respectively, has been recorded directly to shareholders’ equity. Additionally, a portion of the annual change in the net deferred tax asset relates to pension adjustments. The related 2020 and 2019 deferred tax expense (benefit) of $292,000 and $42,000 respectively, has been recorded directly to shareholders’ equity. The balance of the 2020 increase in the net deferred tax liability of $10,054,000 is reflected as deferred income tax expense, and the balance of the 2019 increase in the net deferred tax liability of $1,811,000 is reflected as deferred income tax expense in the consolidated statement of income.
The valuation allowances for 2020 and 2019 relate primarily to state net operating loss carryforwards. It is management’s belief that the realization of the remaining net deferred tax assets is more likely than not. The Company adjusted its net deferred income tax asset as a result of reductions in the North Carolina income tax rate, which reduced the state income tax rate to 2.5% effective January 1, 2019.
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 2017. There are no indications of any material adjustments relating to any examination currently being conducted by any taxing authority.
Retained earnings at December 31, 2020 and 2019 include approximately $6,869,000 representing pre-1988 tax bad debt reserve base year amounts for which no deferred income tax liability has been provided since these
reserves are not expected to reverse or may never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to meet the definition of a bank, dividend payments in excess of accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Bank’s stock.
The following is a reconcilement of federal income tax expense at the statutory rate of 21% at December 31, 2020 and December 31, 2019 and December 31, 2018, to the income tax provision reported in the financial statements.
($ in thousands) 2020 2019 2018
Tax provision at statutory rate $ 21,657 24,418 23,830
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (1,050) (1,186) (1,117)
Low income housing tax credits (772) (756) (698)
Bank-owned life insurance income (532) (538) (532)
Non-deductible interest expense 23 43 27
State income taxes, net of federal benefit 2,117 2,178 2,639
Change in valuation allowance (20) 4 (8)
Impact of tax reform - (73) -
Other, net 231 140 48
Total $ 21,654 21654000 $ 24,230 $ 24,189
Note 8. Time Deposits and Related Party Deposits
At December 31, 2020, the scheduled maturities of time deposits were as follows:
($ in thousands)
2021 $ 681,719
2022 63,423
2023 21,070
2024 8,217
2025 15,829
Thereafter 674
$ 790,932
Deposits received from executive officers and directors and their associates totaled approximately $4.4 million and $1.3 million at December 31, 2020 and 2019, respectively.
Deposit overdrafts of approximately $0.5 million and $0.7 million at December 31, 2020 and 2019 are included within "Loans" on the Consolidated Balance Sheets.
As of December 31, 2020 and 2019, the Company held $375.7 million and $442.2 million, respectively, in time deposits of $250,000 or more (which is the current FDIC insurance limit for insured deposits as of December 31, 2020). Included in these deposits were brokered deposits of $20.2 million and $86.1 million at December 31, 2020 and 2019, respectively.
Note 9. Borrowings and Borrowings Availability
The following tables present information regarding the Company’s outstanding borrowings at December 31, 2020 and 2019 - dollars are in thousands:
Description - 2020 Due date Call Feature 2020 Amount Interest Rate
FHLB Principal Reducing Credit
7/24/2023 None 124 1.00% fixed
FHLB Principal Reducing Credit
12/22/2023 None 991 1.25% fixed
FHLB Principal Reducing Credit
1/15/2026 None 5,500 1.98% fixed
FHLB Principal Reducing Credit
6/26/2028 None 235 0.25% fixed
FHLB Principal Reducing Credit
7/17/2028 None 49 0.00% fixed
FHLB Principal Reducing Credit
8/18/2028 None 174 1.00% fixed
FHLB Principal Reducing Credit
8/22/2028 None 174 1.00% fixed
FHLB Principal Reducing Credit
12/20/2028 None 355 0.50% fixed
Other Borrowing 4/7/2022 None 103 1.00% fixed
Trust Preferred Securities
1/23/2034 Quarterly by Company
beginning 1/23/2009 20,620 2.91% at 12/31/2020
adjustable rate
3 month LIBOR + 2.70%
Trust Preferred Securities
6/15/2036 Quarterly by Company
beginning 6/15/2011 25,774 1.61% at 12/31/2020
adjustable rate
3 month LIBOR + 1.39%
Trust Preferred Securities
1/7/2035 Quarterly by Company
beginning 1/7/2010 10,310 2.24% at 12/31/2020
adjustable rate
3 month LIBOR + 2.00%
Total borrowings / weighted average rate as of December 31, 2020 $ 64,409 2.22%
Unamortized discount on acquired borrowings (2,580)
Total borrowings $ 61,829
Description - 2019 Due date Call Feature 2019 Amount Interest Rate
FHLB Term Note
1/30/2020 None $ 100,000 1.70% fixed
FHLB Term Note
1/31/2020 None 68,000 1.70% fixed
FHLB Term Note
1/31/2020 None 30,000 1.70% fixed
FHLB Term Note
5/29/2020 None 40,000 1.62% fixed
FHLB Principal Reducing Credit
7/24/2023 None 168 1.00% fixed
FHLB Principal Reducing Credit
12/22/2023 None 1,029 1.25% fixed
FHLB Principal Reducing Credit
1/15/2026 None 6,500 1.98% fixed
FHLB Principal Reducing Credit
6/26/2028 None 245 0.25% fixed
FHLB Principal Reducing Credit
7/17/2028 None 55 0.00% fixed
FHLB Principal Reducing Credit
8/18/2028 None 181 1.00% fixed
FHLB Principal Reducing Credit
8/22/2028 None 181 1.00% fixed
FHLB Principal Reducing Credit
12/20/2028 None 367 0.50% fixed
Trust Preferred Securities
1/23/2034 Quarterly by Company
beginning 1/23/2009 20,620 4.64% at 12/31/2019
adjustable rate
3 month LIBOR + 2.70%
Trust Preferred Securities
6/15/2036 Quarterly by Company
beginning 6/15/2011 25,774 3.28% at 12/31/2019
adjustable rate
3 month LIBOR + 1.39%
Trust Preferred Securities
1/7/2035 Quarterly by Company
beginning 1/7/2010 10,310 3.99% at 12/31/2019
adjustable rate
3 month LIBOR + 2.00%
Total borrowings / weighted average rate as of December 31, 2019 $ 303,430 2.68%
Unamortized discount on acquired borrowings (2,759)
Total borrowings $ 300,671
All outstanding FHLB borrowings may be accelerated immediately by the FHLB in certain circumstances, including material adverse changes in the condition of the Company or if the Company’s qualifying collateral amounts to less than that required under the terms of the FHLB borrowing agreement.
In the above table for December 31, 2019, borrowings of $253.0 million at December 31, 2019 were considered short-term as their original maturity terms were for less than 3 months. There were no short-term borrowings at December 31, 2020.
In the above tables, the $20.6 million in borrowings due on January 23, 2034 relate to borrowings structured as trust preferred capital securities that were issued by First Bancorp Capital Trusts II and III ($10.3 million by each trust), which are unconsolidated subsidiaries of the Company, on December 19, 2003 and qualify as capital for regulatory capital adequacy requirements. These unsecured debt securities became callable by the Company at par on any quarterly interest payment date beginning on January 23, 2009. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.70%.
In the above tables, the $25.8 million in borrowings due on June 15, 2036 relate to borrowings structured as trust preferred capital securities that were issued by First Bancorp Capital Trust IV, an unconsolidated subsidiary of the Company, on April 13, 2006 and qualify as capital for regulatory capital adequacy requirements. These unsecured debt securities became callable by the Company at par on any quarterly interest payment date beginning on June 15, 2011. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 1.39%.
In the above tables, the $10.3 million in borrowings due on January 7, 2035 relate to borrowings structured as trust preferred capital securities that were issued by Carolina Capital Trust, an unconsolidated subsidiary of the Company. The Company acquired Carolina Bank Holdings, Inc. and its subsidiary, Carolina Capital Trust, on March 3, 2017. These unsecured debt securities qualify as capital for regulatory capital adequacy requirements and
became callable by the Company at par on any quarterly interest payment date beginning on January 7, 2010. The interest rate on these debt securities adjusts on a quarterly basis at a rate of three-month LIBOR plus 2.00%.
At December 31, 2020, the Company had three sources of readily available borrowing capacity - 1) an approximately $1.02 billion line of credit with the FHLB, of which $8 million was outstanding at December 31, 2020 and $247 million was outstanding at December 31, 2019, 2) a $100 million federal funds line of credit with a correspondent bank, of which none was outstanding at December 31, 2020 or 2019, and 3) an approximately $134 million line of credit through the Federal Reserve Bank of Richmond’s (FRB) discount window, of which none was outstanding at December 31, 2020 or 2019.
The Company’s line of credit with the FHLB totaling approximately $1.02 billion can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity needs and is secured by the Company’s FHLB stock and a blanket lien on most of its real estate loan portfolio.
The Company’s correspondent bank relationship allows the Company to purchase up to $100 million in federal funds on an overnight, unsecured basis (federal funds purchased). The Company had no borrowings outstanding under this line at December 31, 2020 or 2019.
The Company has a line of credit with the FRB discount window. This line is secured by a blanket lien on a portion of the Company’s commercial and consumer loan portfolio (excluding real estate). Based on the collateral owned by the Company as of December 31, 2020, the available line of credit was approximately $134 million. The Company had no borrowings outstanding under this line of credit at December 31, 2020 or 2019.
Note 10. Leases
The Company enters into leases in the normal course of business. As of December 31, 2020, the Company leased nine branch offices for which the land and buildings are leased and eight branch offices for which the land is leased but the building is owned. The Company also leases office space for several operational departments. All of the Company’s leases are operating leases under applicable accounting standards and the lease agreements have maturity dates ranging from January 2021 through May 2076, some of which include options for multiple five- and ten-year extensions. The weighted average remaining life of the lease term for these leases was 21.0 years as of December 31, 2020. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. 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.
Leases are classified as either operating or finance leases at the lease commencement date, and as previously noted, all of the Company's leases have been determined to be operating leases. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company uses its incremental borrowing rate, on a collateralized basis, at lease commencement to calculate the present value of lease payments when the rate implicit in the lease is not known. The weighted average discount rate for leases was 3.27% as of December 31, 2020.
The right-of-use assets and lease liabilities were $17.5 million and $17.9 million as of December 31, 2020, respectively, and were $19.7 million and $19.9 million as of December 31, 2019, respectively. Prior to 2019, the accounting standards did not require assets or liabilities to be recorded for operating leases.
Total operating lease expense charged to operations under all operating lease agreements was $2.9 million in 2020, $2.6 million in 2019, and $2.3 million in 2018.
Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2020 are as follows:
($ in thousands)
Year ending December 31:
2021 $ 2,245
2022 1,832
2023 1,673
2024 1,472
2025 1,242
Thereafter 18,272
Total undiscounted lease payments 26,736
Less effect of discounting (8,868)
Present value of estimated lease payments (lease liability) $ 17,868
Note 11. Employee Benefit Plans
401(k) Plan. The Company sponsors a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code ("IRC"). New employees who have met the age requirement are automatically enrolled in the plan at a 5% deferral rate. The automatic deferral can be modified by the employee at any time. An eligible employee may contribute up to 15% of annual salary to the plan, not to exceed IRC limits. The Company’s matches 100% of the employee’s contribution up to 6%. The Company’s matching contribution expense was $4.3 million, $4.2 million and $3.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. Although discretionary contributions by the Company are permitted by the plan, the Company did not make any such contributions in the years presented. The Company’s matching and discretionary contributions are made according to the same investment elections each participant has established for their deferral contributions.
Pension Plan. Historically, the Company offered a noncontributory defined benefit retirement plan (the “Pension Plan”) that qualified under Section 401(a) of the Internal Revenue Code. The Pension Plan provided for a monthly payment, at normal retirement age of 65, equal to one-twelfth of the sum of (i) 0.75% of Final Average Annual Compensation (five highest consecutive calendar years’ earnings out of the last ten years of employment) multiplied by the employee’s years of service not in excess of 40 years, and (ii) 0.65% of Final Average Annual Compensation in excess of the average social security wage base multiplied by years of service not in excess of 35 years. Benefits were fully vested after five years of service. Effective December 31, 2012, the Company froze the Pension Plan for all participants.
The Company’s contributions to the Pension Plan are based on computations by independent actuarial consultants and are intended to be deductible for income tax purposes. As discussed below, the contributions are invested to provide for benefits under the Pension Plan. The Company did not make any contributions to the Pension Plan for the years presented. The Company also does not expect to contribute to the Pension Plan in 2021.
The following table reconciles the beginning and ending balances of the Pension Plan’s benefit obligation, as computed by the Company’s independent actuarial consultants, and its plan assets, with the difference between the two amounts representing the funded status of the Pension Plan as of the end of the respective year.
($ in thousands) 2020 2019 2018
Change in benefit obligation
Benefit obligation at beginning of year $ 41,592 36,354 38,150
Service cost - - -
Interest cost 1,223 1,482 1,312
Actuarial loss (gain) 3,788 5,492 (1,160)
Benefits paid (1,853) (1,736) (1,948)
Benefit obligation at end of year 44,750 41,592 36,354
Change in plan assets
Plan assets at beginning of year 43,824 39,170 41,306
Actual return on plan assets 6,196 6,390 (188)
Employer contributions - - -
Benefits paid (1,853) (1,736) (1,948)
Plan assets at end of year 48,167 43,824 39,170
Funded status at end of year $ 3,417 2,232 2,816
The accumulated benefit obligation related to the Pension Plan was $44,750,000, $41,592,000, and $36,354,000 at December 31, 2020, 2019, and 2018, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets at December 31, 2020 and 2019 as it relates to the Pension Plan, excluding the related deferred tax assets.
($ in thousands) 2020 2019
Other assets $ 3,417 2,232
The following table presents information regarding the amounts recognized in accumulated other comprehensive income (loss) (“AOCI”) at December 31, 2020 and 2019, as it relates to the Pension Plan.
($ in thousands) 2020 2019
Net loss $ (1,771) (3,721)
Prior service cost - -
Amount recognized in AOCI before tax effect (1,771) (3,721)
Tax benefit 407 855
Net amount recognized as decrease to AOCI $ (1,364) (2,866)
The following table reconciles the beginning and ending balances of AOCI at December 31, 2020 and 2019, as it relates to the Pension Plan:
($ in thousands) 2020 2019
Accumulated other comprehensive loss at beginning of fiscal year
$ (2,866) (3,091)
Net gain (loss) arising during period 1,107 (664)
Amortization of unrecognized actuarial loss
843 977
Tax benefit of changes during the year, net
(448) (88)
Accumulated other comprehensive loss at end of fiscal year
$ (1,364) (2,866)
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the Pension Plan:
($ in thousands) 2020 2019
Prepaid pension cost as of beginning of fiscal year
$ 5,954 6,851
Net periodic pension cost for fiscal year
(766) (897)
Actual employer contributions
- -
Prepaid pension asset as of end of fiscal year
$ 5,188 5,954
Net pension cost for the Pension Plan included the following components for the years ended December 31, 2020, 2019, and 2018:
($ in thousands) 2020 2019 2018
Service cost - benefits earned during the period $ - - -
Interest cost on projected benefit obligation 1,223 1,482 1,312
Expected return on plan assets (1,300) (1,562) (1,115)
Net amortization and deferral 843 977 34
Net periodic pension cost $ 766 897 231
The estimated net loss for the Pension Plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is $590,000.
The following table is an estimate of the benefits that will be paid in accordance with the Pension Plan during the indicated time periods, assuming the Pension Plan is operated on an ongoing basis.
($ in thousands) Estimated
benefit
payments
Year ending December 31, 2021 $ 1,843
Year ending December 31, 2022 1,918
Year ending December 31, 2023 1,977
Year ending December 31, 2024 2,021
Year ending December 31, 2025 2,085
Years ending December 31, 2026-2030 10,891
The investment objective of the Company’s Pension Plan is to ensure that there are sufficient assets to fund regular pension benefits payable to employees over the long-term life of the plan. The Plan seeks to allocate plan assets in a manner that is closely duration-matched with the actuarial projected cash flows of the Plan liabilities, consistent with prudent standards for preservation of capital, tolerance of investment risk, and maintenance of liquidity. Assets of the Plan are held by Fidelity Investments (the “Trustee”).
In 2018, the Plan adopted a liability-driven investment (“LDI”) approach to help meet these objectives. The LDI strategy employs a structured fixed-income portfolio designed to reduce volatility in the Plan’s future funding requirements and funding status. This is accomplished by using a blend of high quality corporate and government fixed-income securities, with both intermediate and long-term durations. Generally, the value of these fixed income securities is inversely correlated to changes in market interest rates, which substantially offsets changes in the value of the pension benefit obligation caused by changes in the interest rate used to discount plan liabilities.
The fair values of the Company’s pension plan assets at December 31, 2020, by asset category, were as follows:
($ in thousands) Total Fair Value at December 31,
2020 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents $ 337 - 337 -
Investment funds
Fixed income funds 47,830 - 47,830 -
Total $ 48,167 - 48,167 -
The fair values of the Company’s pension plan assets at December 31, 2019, by asset category, were as follows:
($ in thousands) Total Fair Value at December 31,
2019 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Cash and cash equivalents $ 274 - 274 -
Investment funds
Fixed income funds 43,550 - 43,550 -
Total $ 43,824 - 43,824 -
The following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2020 and 2019.
- Cash and cash equivalents: Valued at net asset value (“NAV”), which can be validated with a sufficient level of observable activity (i.e. purchases and sales at NAV), and therefore, the funds were classified within Level 2 of the fair value hierarchy.
- Fixed income funds consist of commingled funds that primarily include investments in U.S. government securities and corporate bonds. The commingled funds also include an insignificant portion of investments in other asset-based securities, municipal securities, etc. The commingled funds are valued at the NAV for the units in the fund. The NAV, as provided by the Trustee, is used as practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund.
Supplemental Executive Retirement Plan. Historically, the Company sponsored a Supplemental Executive Retirement Plan (the “SERP”) for the benefit of certain senior management executives of the Company. The purpose of the SERP was to provide additional monthly pension benefits to ensure that each such senior management executive would receive lifetime monthly pension benefits equal to 3% of his or her final average compensation multiplied by his or her years of service (maximum of 20 years) to the Company or its subsidiaries, subject to a maximum of 60% of his or her final average compensation. The amount of a participant’s monthly SERP benefit is reduced by (i) the amount payable under the Company’s qualified Pension Plan (described above), and (ii) 50% of the participant’s primary social security benefit. Final average compensation means the average of the five highest consecutive calendar years of earnings during the last ten years of service prior to termination of employment. The SERP is an unfunded plan. Payments are made from the general assets of the Company. Effective December 31, 2012, the Company froze the SERP to all participants.
The following table reconciles the beginning and ending balances of the SERP’s benefit obligation, as computed by the Company’s independent actuarial consultants:
($ in thousands) 2020 2019 2018
Change in benefit obligation
Projected benefit obligation at beginning of year $ 5,638 5,794 5,970
Service cost - - 124
Interest cost 158 219 200
Actuarial (gain) loss 517 23 (102)
Benefits paid (331) (398) (398)
Projected benefit obligation at end of year 5,982 5,638 5,794
Plan assets - - -
Funded status at end of year $ (5,982) (5,638) (5,794)
The accumulated benefit obligation related to the SERP was $5,982,000, $5,638,000, and $5,794,000 at December 31, 2020, 2019, and 2018, respectively.
The following table presents information regarding the amounts recognized in the consolidated balance sheets at December 31, 2020 and 2019 as it relates to the SERP, excluding the related deferred tax assets.
($ in thousands) 2020 2019
Other liabilities $ (5,982) (5,638)
The following table presents information regarding the amounts recognized in AOCI at December 31, 2020 and 2019, as it relates to the SERP:
($ in thousands) 2020 2019
Net (loss) gain $ (46) 629
Prior service cost - -
Amount recognized in AOCI before tax effect (46) 629
Tax expense 11 (145)
Net amount recognized as (decrease) increase to AOCI $ (35) 484
The following table reconciles the beginning and ending balances of AOCI at December 31, 2020 and 2019, as it relates to the SERP:
($ in thousands) 2020 2019
Accumulated other comprehensive income (loss) at beginning of fiscal year $ 484 624
Net (loss) gain arising during period (517) (22)
Prior service cost - -
Amortization of unrecognized actuarial gain (157) (163)
Amortization of prior service cost and transition obligation - -
Tax expense related to changes during the year, net 155 45
Accumulated other comprehensive income (loss) at end of fiscal year $ (35) 484
The following table reconciles the beginning and ending balances of the prepaid pension cost related to the SERP:
($ in thousands) 2020 2019
Accrued liability as of beginning of fiscal year $ (6,266) (6,608)
Net periodic pension cost for fiscal year (1) (56)
Benefits paid 331 398
Accrued liability as of end of fiscal year $ (5,936) (6,266)
Net pension cost for the SERP included the following components for the years ended December 31, 2020, 2019, and 2018:
($ in thousands) 2020 2019 2018
Service cost - benefits earned during the period $ - - 124
Interest cost on projected benefit obligation 158 219 200
Net amortization and deferral (157) (163) (13)
Net periodic pension cost $ 1 56 311
The estimated net loss for the SERP that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is $15,000.
The following table is an estimate of the benefits that will be paid in accordance with the SERP during the indicated time periods:
($ in thousands)
Estimated
benefit
payments
Year ending December 31, 2021 $ 330
Year ending December 31, 2022 326
Year ending December 31, 2023 322
Year ending December 31, 2024 318
Year ending December 31, 2025 340
Years ending December 31, 2026-2030 1,719
Applicable to both Plans
The components of net periodic benefit cost other than the service cost component are included in the line item "Other operating expenses" in the Consolidated Statements of Income.
The following assumptions were used in determining the actuarial information for the Pension Plan and the SERP for the years ended December 31, 2020, 2019, and 2018:
2020 2019 2018
Pension
Plan SERP Pension
Plan SERP Pension
Plan SERP
Discount rate used to determine net periodic pension cost
3.03 % 2.89 % 4.08 % 3.92 % 3.46 % 3.46 %
Discount rate used to calculate end of year liability disclosures
2.24 % 2.04 % 3.03 % 2.89 % 4.08 % 3.92 %
Expected long-term rate of return on assets
3.03 % n/a 4.08 % n/a 2.75 % n/a
Rate of compensation increase
n/a n/a n/a n/a n/a n/a
The Company’s discount rate policy for the Pension Plan is based on a calculation of the Company’s expected pension payments, with those payments discounted using the FTSE yield curve (formerly called the Citigroup Pension Index yield curve) that matches the specific expected cash flows of the Pension Plan. The discount rate policy for the SERP is to use the FTSE yield curve that matches the expected cash flows of the SERP.
Note 12. Commitments, Contingencies, and Concentrations of Credit Risk
See Note 10 with respect to future obligations under operating leases.
In the normal course of business, there are various outstanding commitments to extend credit that are not reflected in the financial statements. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Commitments may expire without being used. The following table presents the Company’s outstanding loan commitments at December 31, 2020 and December 31, 2019.
($ in thousands) December 31, 2020 December 31, 2019
Type of Commitment Fixed Rate Variable Rate Total Fixed Rate Variable Rate Total
Loan commitments
$ 238,745 94,218 332,963 263,775 123,169 386,944
Unused lines of credit
188,014 900,046 1,088,060 169,278 766,450 935,728
Total
$ 426,759 994,264 1,421,023 433,053 889,619 1,322,672
At December 31, 2020 and 2019, the Company had $14.1 million and $12.0 million, respectively, in standby letters of credit outstanding. The Company has no carrying amount for these standby letters of credit at either of those dates. The nature of the standby letters of credit is a stand-alone obligation made on behalf of the Company’s customers to suppliers of the customers to guarantee payments owed to the supplier by the customer. The standby letters of credit are generally for terms for one year, at which time they may be renewed for another year if both parties agree. The payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by the customer to the supplier. The maximum potential amount of future payments (undiscounted) the Company could be required to make under the guarantees in the event of nonperformance by the parties to whom credit or financial guarantees have been extended is represented by the contractual amount of the standby letter of credit. In the event that the Company is required to honor a standby letter of credit, a note, already executed with the customer, is triggered which provides repayment terms and any collateral. Over the past two years, the Company has only had to honor a minimal amount of standby letters of credit, which have been or are being repaid by the borrower without any loss to the Company. Management expects any draws under existing commitments to be funded through normal operations.
The Company is not involved in any legal proceedings which, in management’s opinion, could have a material effect on the consolidated financial position of the Company.
The Bank grants primarily commercial and installment loans to customers throughout its market area, which consists of branch locations in 36 counties across all regions of North Carolina and three counties in northeastern South Carolina. The real estate loan portfolio can be affected by the condition of the local real estate market. The commercial and installment loan portfolios can be affected by local economic conditions.
The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, the Company monitors exposure to credit risk that could arise from potential concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Bank makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. The Company has determined that there is no concentration of credit risk associated with its lending policies or practices.
The Company’s investment portfolio consists principally of obligations of government-sponsored enterprises, mortgage-backed securities guaranteed by government-sponsored enterprises, corporate bonds, and general obligation municipal securities. The Company also holds stock with the Federal Reserve Bank and the Federal Home Loan Bank as a requirement for membership in the system. The following are the fair values at December 31, 2020 of securities to any one issuer/guarantor that exceed $5.0 million, with such amounts representing the maximum amount of credit risk that the Company would incur if the issuer did not repay the obligation.
($ in thousands)
Issuer
Amortized Cost Fair Value
Fannie Mae - mortgage-backed securities $ 571,245 585,035
Freddie Mac - mortgage-backed securities 549,811 552,830
Ginnie Mae - mortgage-backed securities 234,780 237,159
Federal Farm Credit Bank - bonds 40,015 40,356
Federal Home Loan Bank system - bonds 30,000 29,850
Small Business Administration securities 22,150 22,436
Federal Reserve Bank - common stock 17,671 17,671
First Citizens Bank - corporate bonds 11,000 10,999
Bank of America corporate bonds 7,000 7,409
Citigroup, Inc. corporate bonds 6,014 6,346
Federal Home Loan Bank of Atlanta - common stock 5,855 5,855
Loudoun County, Virginia - municipal bond 5,599 5,735
Goldman Sachs Group Inc. corporate bond 5,037 5,319
JP Morgan Chase corporate bond 5,009 5,294
The Company also periodically invests in limited partnerships, limited liability companies (“LLCs”), and other privately held companies. As of December 31, 2020, the Company had a remaining funding commitments of $6.3 million related to these investments.
The Company primarily places its deposits and correspondent accounts with the Federal Home Loan Bank of Atlanta, the Federal Reserve Bank, and Pacific Coast Bankers Bank (“PCBB”). At December 31, 2020, the Company had deposits in the Federal Home Loan Bank of Atlanta totaling $42.6 million, deposits of $230.7 million in the Federal Reserve Bank, and deposits of $2.8 million in PCBB. None of the deposits held at the Federal Home Loan Bank of Atlanta or the Federal Reserve Bank are FDIC-insured, however the Federal Reserve Bank is a government entity and therefore risk of loss is minimal. The deposits held at PCBB are FDIC-insured up to $250,000.
Note 13. Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal and most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2020.
($ in thousands)
Description of Financial Instruments Fair Value at December 31,
2020 Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities
$ 70,206 - 70,206 -
Mortgage-backed securities
1,337,706 - 1,337,706 -
Corporate bonds
45,220 - 45,220 -
Total available for sale securities
$ 1,453,132 - 1,453,132 -
Presold mortgages in process of settlement $ 42,271 42,271 - -
Nonrecurring
Impaired loans
$ 22,142 - - 22,142
Foreclosed real estate
1,484 - - 1,484
The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2019.
($ in thousands)
Description of Financial Instruments Fair Value at December 31,
2019 Quoted Prices in
Active Markets
for Identical
Assets (Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Recurring
Securities available for sale:
Government-sponsored enterprise securities
$ 20,009 - 20,009 -
Mortgage-backed securities
767,285 - 767,285 -
Corporate bonds
34,651 - 34,651 -
Total available for sale securities
$ 821,945 - 821,945 -
Presold mortgages in process of settlement $ 19,712 19,712 - -
Nonrecurring
Impaired loans
$ 16,215 - - 16,215
Foreclosed real estate
1,830 - - 1,830
The following is a description of the valuation methodologies used for instruments measured at fair value.
Presold Mortgages in Process of Settlement - The fair value is based on the committed price that an investor has agreed to pay for the loan and is considered a Level 1 input.
Securities Available for Sale - When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by our third-party bond accounting provider using matrix pricing. Matrix pricing is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. For the Company, Level 2 securities include mortgage-backed securities, commercial mortgage-backed obligations, government-sponsored enterprise securities, and corporate
bonds. In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.
The Company reviews the pricing methodologies utilized by the bond accounting provider to ensure the fair value determination is consistent with the applicable accounting guidance and that the investments are properly classified in the fair value hierarchy.
Impaired loans - Fair values for impaired loans in the above table are measured on a non-recurring basis and are based on the underlying collateral values securing the loans, adjusted for estimated selling costs, or the net present value of the cash flows expected to be received for such loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined using an income or market valuation approach based on an appraisal conducted by an independent, licensed third party appraiser (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable borrower’s financial statements if not considered significant. Likewise, values for inventory and accounts receivable collateral are based on borrower financial statement balances or aging reports on a discounted basis as appropriate (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.
Foreclosed real estate - Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value. Fair value is measured on a non-recurring basis and is based upon independent market prices or current appraisals that are generally prepared using an income or market valuation approach and conducted by an independent, licensed third party appraiser, adjusted for estimated selling costs (Level 3). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. For any real estate valuations subsequent to foreclosure, any excess of the real estate recorded value over the fair value of the real estate is treated as a foreclosed real estate write-down on the Consolidated Statements of Income.
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description Fair Value at December 31,
2020 Valuation
Technique Significant Unobservable
Inputs Range (Weighted Average)
Impaired loans - valued at collateral value $ 16,000 Appraised value Discounts applied for estimated costs to sell 10%
Impaired loans - valued at PV of expected cash flows $ 6,142 PV of expected cash flows Discount rates used in the calculation of PV of expected cash flows 4-11% (6.21%)
Foreclosed real estate 1,484 Appraised value Discounts for estimated costs to sell 10%
For Level 3 assets and liabilities measured at fair value on a non-recurring basis as of December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:
($ in thousands)
Description Fair Value at December 31,
2019 Valuation
Technique Significant Unobservable
Inputs Range (Weighted Average)
Impaired loans - valued at collateral value $ 10,718 Appraised value Discounts applied for estimated costs to sell 10%
Impaired loans - valued at PV of expected cash flows $ 5,497 PV of expected cash flows Discount rates used in the calculation of PV of expected cash flows 4-11% (6.50%)
Foreclosed real estate 1,830 Appraised value Discounts for estimated costs to sell 10%
The carrying amounts and estimated fair values of financial instruments not carried at fair value as of December 31, 2020 and 2019 are as follows:
December 31, 2020 December 31, 2019
($ in thousands) Level in
Fair Value
Hierarchy Carrying
Amount Estimated
Fair Value Carrying
Amount Estimated
Fair Value
Cash and due from banks, noninterest-bearing
Level 1 $ 93,724 93,724 64,519 64,519
Due from banks, interest-bearing
Level 1 273,566 273,566 166,783 166,783
Securities held to maturity
Level 2 167,551 170,734 67,932 68,333
SBA loans held for sale Level 2 6,077 7,465 - -
Total loans, net of allowance
Level 3 4,678,927 4,661,197 4,432,068 4,407,610
Accrued interest receivable
Level 1 20,272 20,272 16,648 16,648
Bank-owned life insurance
Level 1 106,974 106,974 104,441 104,441
SBA servicing asset Level 3 5,788 6,569 5,383 5,649
Deposits
Level 2 6,273,596 6,275,329 4,931,355 4,930,751
Borrowings
Level 2 61,829 53,321 300,671 295,399
Accrued interest payable
Level 2 904 904 2,154 2,154
Note 14. Stock-Based Compensation
The Company recorded total stock-based compensation expense of $2,540,000, $2,270,000 and $1,569,000 for the years ended December 31, 2020, 2019, and 2018, respectively. The Company recognized $584,000, $522,000, and $367,000 of income tax benefits related to stock-based compensation expense in the income statement for the years ended December 31, 2020, 2019, and 2018, respectively.
At December 31, 2020, 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, 2020, the Equity Plan had 549,876 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 plans’ 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 stock, restricted performance stock, unrestricted stock, and performance units.
Recent equity awards to employees have been in the form of shares of restricted stock with service vesting conditions only. Compensation expense for these grants is recorded over the requisite service periods. Upon forfeiture, any previously recognized compensation cost is reversed. Upon a change in control (as defined in the Equity Plan), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.
Certain of the Company’s equity grants contain terms that provide for a graded vesting schedule whereby portions of the award vest in increments over the requisite service period. The Company recognizes compensation expense for awards with graded vesting schedules on a straight-line basis over the requisite service period for each incremental award. Compensation expense is based on the estimated number of stock awards that will ultimately vest. Over the past five years, there have been insignificant amounts of forfeitures, and therefore the Company assumes that all awards granted with service conditions only will vest. The Company issues new shares of common stock when options are exercised.
In addition to employee equity awards, the Company's practice is to grant common shares, valued at approximately $32,000, to each non-employee director (currently 11 in total) in June of each year. Compensation expense associated with these director awards is recognized on the date of the award since there are no vesting conditions. On June 1, 2020, the Company granted 14,146 shares of common stock to non-employee directors (1,286 shares per director), at a fair market value of $24.87 per share, which was the closing price of the Company’s common stock on that date, which resulted in $352,000 in expense. On June 1, 2019, the Company granted 9,030 shares of common stock to non-employee directors (903 shares per director), at a fair market value of $35.41 per share, which was the closing price of the Company’s common stock on that date, which resulted in $320,000 in expense.
The expense associated with director grants is classified as "other operating expense" in the Consolidated Statements of Income.
The following table presents information regarding the activity during 2018, 2019, and 2020 related to the Company’s outstanding restricted stock:
Long-Term Restricted Stock
Shares Grant Date Fair Value
Nonvested at January 1, 2018 103,063 $ 24.08
Granted during the period 66,060 40.04
Vested during the period (35,703) 22.82
Forfeited or expired during the period (4,169) 29.99
Nonvested at December 31, 2018 129,251 $ 32.39
Granted during the period 82,826 36.36
Vested during the period (51,757) 25.02
Forfeited or expired during the period (954) 41.93
Nonvested at December 31, 2019 159,366 $ 36.79
Granted during the period 68,704 26.96
Vested during the period (55,965) 33.91
Forfeited or expired during the period - -
Nonvested at December 31, 2020 172,105 $ 33.80
Total unrecognized compensation expense as of December 31, 2020 amounted to $2,554,000 with a weighted average remaining term of 1.8 years. The Company expects to record $1,577,000 of compensation expense in the next twelve months related to these nonvested awards that are outstanding at December 31, 2020.
Prior to 2010, stock options were the primary form of stock-based compensation utilized by the Company. At December 31, 2019 and 2020, there were no stock options outstanding.
The following table presents information regarding the activity since January 1, 2018 related to all of the Company’s stock options outstanding:
Options Outstanding
Number of
Shares Weighted-
Average
Exercise
Price Weighted-
Average
Contractual
Term (years) Aggregate
Intrinsic
Value
Balance at January 1, 2018 38,689 $ 16.09
Granted - -
Exercised (29,689) 16.61 $ 659,743
Forfeited - -
Expired - -
Balance at December 31, 2018 9,000 $ 14.35
Granted - -
Exercised (9,000) 14.35 $ 203,963
Forfeited - -
Expired - -
Balance at December 31, 2019 - $ -
Granted - -
Exercised - - $ -
Forfeited - -
Expired - -
Outstanding at December 31, 2020 - $ - - $ -
Exercisable at December 31, 2020 - $ - - $ -
In 2019 and 2018, the Company received $129,000 and $324,000, respectively, as a result of stock option exercises.
Note 15. Regulatory Restrictions
The Company is regulated by the Board of Governors of 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, 2020, approximately $590,672,000 of the Company’s investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
The average reserve balance maintained by the Bank under the requirements of the FRB was approximately $1,099,000 for the year ended December 31, 2020.
The Company and the Bank must comply with regulatory capital requirements established by the FRB. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
In 2013, the FRB approved final rules implementing the Basel Committee on Banking Supervision capital guidelines, referred to a “Basel III.” The final rules established a new “Common Equity Tier I” ratio; new higher
capital ratio requirements, including a capital conservation buffer; narrowed the definitions of capital; imposed new operating restrictions on banking organizations with insufficient capital buffers; and increased the risk weighting of certain assets. The final rules became effective January 1, 2015 for the Company. The capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk weighted assets, and increased each year until fully implemented at 2.5% in January 1, 2019. The capital conservation buffer requirement at December 31, 2020 was 2.5%.
As of December 31, 2020, the capital standards require the Company to maintain minimum ratios of “Common Equity Tier I” capital to total risk-weighted assets, “Tier I” capital to total risk-weighted assets, and total capital to risk-weighted assets of 4.50%, 6.00% and 8.00%, respectively. Common Equity Tier I capital is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier I capital is comprised of Common Equity Tier I capital plus Additional Tier I Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier I capital plus certain adjustments, the largest of which is our allowance for loan losses. Risk-weighted assets refer to our on- and off-balance sheet exposures, adjusted for their related risk levels using formulas set forth in Federal Reserve and FDIC regulations.
In addition to the risk-based capital requirements described above, the Company and the Bank are subject to a leverage capital requirement, which calls for a minimum ratio of Tier I capital (as defined above) to quarterly average total assets of 3.00% to 5.00%, depending upon the institution’s composite ratings as determined by its regulators. The Federal Reserve has not advised the Company of any requirement specifically applicable to it.
In addition to the minimum capital requirements described above, the regulatory framework for prompt corrective action also contains specific capital guidelines applicable to banks for classification as “well capitalized,” which are presented with the minimum ratios, the Company’s ratios and the Bank’s ratios as of December 31, 2020 and 2019 in the following table. Based on the most recent notification from its regulators, the Bank is well capitalized under the framework. There are no conditions or events since that notification that management believes have changed the Company’s classification.
Actual Fully Phased-In Regulatory
Guidelines Minimum To Be Well Capitalized
Under Current Prompt
Corrective Action Provisions
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
(must equal or exceed) (must equal or exceed)
As of December 31, 2020
Common Equity Tier I Capital Ratio
Company
$ 639,369 13.19 % $ 339,251 7.00 % $ N/A N/A
Bank
682,312 14.08 % 339,125 7.00 % 314,902 6.50 %
Total Capital Ratio
Company
744,835 15.37 % 508,876 10.50 % N/A N/A
Bank
735,282 15.18 % 508,688 10.50 % 484,465 10.00 %
Tier I Capital Ratio
Company
691,865 14.28 % 411,947 8.50 % N/A N/A
Bank
682,312 14.08 % 411,795 8.50 % 387,572 8.00 %
Leverage Ratio
Company
691,865 9.88 % 280,039 4.00 % N/A N/A
Bank
682,312 9.75 % 280,003 4.00 % 350,004 5.00 %
As of December 31, 2019
Common Equity Tier I Capital Ratio
Company
$ 610,642 13.28 % $ 321,994 7.00 % $ N/A N/A
Bank
661,234 14.38 % 321,866 7.00 % 298,875 6.50 %
Total Capital Ratio
Company
684,931 14.89 % 482,991 10.50 % N/A N/A
Bank
683,178 14.86 % 482,799 10.50 % 459,808 10.00 %
Tier I Capital Ratio
Company
662,987 14.41 % 390,993 8.50 % N/A N/A
Bank
661,234 14.38 % 390,837 8.50 % 367,846 8.00 %
Leverage Ratio
Company
662,987 11.19 % 236,904 4.00 % N/A N/A
Bank
661,234 11.17 % 236,700 4.00 % 295,875 5.00 %
Note 16. Supplementary Income Statement Information
Components of other noninterest income/expense exceeding 1% of total revenue for any of the years ended December 31, 2020, 2019, and 2018 are as follows:
($ in thousands) 2020 2019 2018
Other service charges, commissions, and fees - interchange fees, net $ 14,142 13,814 11,995
Other operating expenses - dues and subscriptions (includes software subscriptions)
4,764 4,250 3,431
Other operating expenses - data processing expense
3,157 3,130 3,234
Other operating expenses - telephone and data line expense
2,893 3,057 3,024
Other operating expenses - marketing
1,960 2,727 3,065
Note 17. Condensed Parent Company Information
Condensed financial data for First Bancorp (parent company only) follows:
CONDENSED BALANCE SHEETS As of December 31,
($ in thousands) 2020 2019
Assets
Cash on deposit with bank subsidiary
$ 15,284 2,014
Investment in wholly-owned subsidiaries, at equity
938,294 904,924
Premises and Equipment
7 7
Other assets
(164) 5,642
Total assets
953,421 912,587
Liabilities and shareholders’ equity
Trust preferred securities
54,200 54,049
Other liabilities
5,800 6,137
Total liabilities
60,000 60,186
Shareholders’ equity 893,421 852,401
Total liabilities and shareholders’ equity
$ 953,421 912,587
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
($ in thousands) 2020 2019 2018
Dividends from wholly-owned subsidiaries
$ 63,100 29,800 15,525
Earnings of wholly-owned subsidiaries, net of dividends
20,899 65,555 77,050
Interest expense
(1,743) (2,648) (2,498)
All other income and expenses, net
(779) (661) (788)
Net income
$ 81,477 92,046 89,289
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31,
($ in thousands) 2020 2019 2018
Operating Activities:
Net income
$ 81,477 92,046 89,289
Equity in undistributed earnings of subsidiaries (20,899) (65,555) (77,050)
Decrease (increase) in other assets 5,806 (5,850) (13)
(Decrease) increase in other liabilities (3) 64 146
Total - operating activities
66,381 20,705 12,372
Financing Activities:
Payment of common stock cash dividends
(20,936) (13,662) (11,281)
Repurchases of common stock (31,868) (10,000) -
Proceeds from issuance of common stock
- 129 324
Stock withheld for payment of taxes
(307) (702) (406)
Total - financing activities
(53,111) (24,235) (11,363)
Net increase (decrease) in cash 13,270 (3,530) 1,009
Cash, beginning of year
2,014 5,544 4,535
Cash, end of year
$ 15,284 2,014 5,544
Note 18. Shareholders’ Equity
Rabbi Trust Obligation
With the acquisition of Carolina Bank in March 2017, the Company assumed a deferred compensation plan for certain members of Carolina Bank’s board of directors that is fully funded by Company stock, which was valued at $7.7 million on the date of acquisition. Subsequent to the acquisition in 2017, approximately $5.5 million of the deferred compensation has been paid to the plan participants. The balances of the related asset and liability were each $2.2 million and $2.6 million at December 31, 2020 and December 31, 2019, respectively, both of which are presented as components of shareholders’ equity.
Equity Issuances
On May 5, 2016, the Company acquired SBA Complete, Inc. (“SBA Complete”), a firm that provides services to financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. Per the terms of the acquisition agreement, the former owners of SBA Complete were eligible for a contingent earn-out payment to be paid in shares of Company stock based on achieving predetermined profitability goals over a cumulative three year period. The Company initially valued the earn-out at $3.0 million and adjusted the value quarterly thereafter based on updated estimates. On May 5, 2019, the three year earn-out period concluded, and based on the terms of the earn-out, the Company issued 78,353 shares of common stock with a value of $3.1 million, which increased shareholders' equity and decreased a previously recorded liability.
On September 1, 2020, the Company completed the acquisition of Magnolia Financial, Inc., a business financing company headquartered in Spartanburg, South Carolina, that makes loans throughout the southeastern United States. In the transaction, the Company acquired $14.6 million in loans and $0.5 million of other assets, and assumed $11.7 million in borrowings, substantially all of which was paid off subsequent to the closing. The transaction value was approximately $10.0 million with the Company paying $9.5 million in cash and issuing 24,096 shares of its common stock, which had a value of approximately $0.5 million.
Stock Repurchases
During 2020, the Company repurchased approximately 1,117,208 shares of the Company’s common stock at an average price of $28.53, which totaled $31.9 million, under a $40 million repurchase authorization publicly announced in November 2019. During 2019, the Company repurchased approximately 282,000 shares of the Company’s common stock at an average price of $35.51, which totaled $10 million, under a $25 million repurchase authorization publicly announced in February 2019. As of December 31, 2020, the Board of Directors has authorized a continuation of its share repurchase program with a maximum repurchase amount of $20 million and an expiration date of December 31, 2021.
Note 19. Earnings Per Share
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Common Share:
For Years Ended December 31,
2020 2019 2018
($ in thousands except per
share amounts) Income
(Numer-ator) Shares
(Denom-inator) Per Share
Amount Income
(Numer-ator) Shares
(Denom-inator) Per Share
Amount Income
(Numer-ator) Shares
(Denom-inator) Per Share
Amount
Basic EPS:
Net income $ 81,477 $ 92,046 $ 89,289
Less: income allocated to participating securities $ (398) $ (450) $ -
Basic EPS per common share $ 81,079 28,839,866 $ 2.81 $ 91,596 29,547,851 $ 3.10 $ 89,289 29,566,259 $ 3.02
Diluted EPS:
Net income $ 81,477 28,839,866 $ 92,046 29,547,851 $ 89,289 29,566,259
Effect of Dilutive Securities - 141,701 - 172,648 - 141,172
Diluted EPS per common share $ 81,477 28,981,567 $ 2.81 $ 92,046 29,720,499 $ 3.10 $ 89,289 29,707,431 $ 3.01
For the years ended December 31, 2020, 2019, and 2018, there were no options that were anti-dilutive.
Note 20. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) for the Company are as follows:
($ in thousands) December 31,
2020 December 31,
2019 December 31,
Unrealized gain (loss) on securities available for sale
$ 20,448 9,743 (12,390)
Deferred tax (liability) asset
(4,699) (2,239) 2,896
Net unrealized gain (loss) on securities available for sale
15,749 7,504 (9,494)
Postretirement plans asset (liability)
(1,817) (3,092) (3,220)
Deferred tax asset (liability)
418 711 753
Net postretirement plans asset (liability)
(1,399) (2,381) (2,467)
Total accumulated other comprehensive income (loss)
$ 14,350 5,123 (11,961)
The following table discloses the changes in accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019, and 2018 (all amounts are net of tax).
($ in thousands) Unrealized Gain
(Loss) on Securities
Available for Sale Postretirement Plans Asset
(Liability) Total
Beginning balance at January 1, 2018 $ (1,694) (2,452) (4,146)
Other comprehensive income (loss) before reclassifications (7,800) (31) (7,831)
Amounts reclassified from accumulated other comprehensive income
- 16 16
Net current-period other comprehensive income (loss) (7,800) (15) (7,815)
Ending balance at December 31, 2018 (9,494) (2,467) (11,961)
Other comprehensive income (loss) before reclassifications 17,073 (528) 16,545
Amounts reclassified from accumulated other comprehensive income
(75) 614 539
Net current-period other comprehensive income (loss) 16,998 86 17,084
Ending balance at Ending balance at December 31, 2019 7,504 (2,381) 5,123
Other comprehensive income (loss) before reclassifications
14,425 454 14,879
Amounts reclassified from accumulated other comprehensive income
(6,180) 528 (5,652)
Net current-period other comprehensive income (loss) 8,245 982 9,227
Ending balance at December 31, 2020 $ 15,749 (1,399) 14,350
Amounts reclassified from accumulated other comprehensive income for Unrealized Gain (Loss) on Securities Available for Sale represent realized securities gains or losses, net of tax effects. Amounts reclassified from accumulated other comprehensive income for Postretirement Plans Asset (Liability) represent amortization of amounts included in Accumulated Other Comprehensive Income, net of taxes, and are recorded in the "Other operating expenses" line item of the Consolidated Statements of Income.
Note 21. Revenue from Contracts with Customers
All of the Company’s revenues that are in the scope of the “Revenue from Contracts with Customers” accounting standard (“ASC 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for years ended December 31, 2020, 2019, and 2018. Items outside the scope of ASC 606 are noted as such.
For the Years Ended December 31,
($ in thousands) 2020 2019 2018
Noninterest Income
In-scope of Topic 606:
Service charges on deposit accounts $ 11,098 12,970 12,690
Other service charges, commissions, and fees:
Interchange income 14,142 13,814 11,995
Other fees 5,955 5,667 4,493
Commissions from sales of insurance and financial products:
Insurance income 5,353 5,289 6,038
Wealth management income 3,495 3,206 2,693
SBA consulting fees 8,644 3,872 4,675
Noninterest income (in-scope of Topic 606) 48,687 44,818 42,584
Noninterest income (out-of-scope of Topic 606) 32,659 14,711 16,358
Total noninterest income $ 81,346 59,529 58,942
A description of the Company’s revenue streams accounted for under ASC 606 is detailed below.
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Service charges on deposits are withdrawn from the customer’s account balance.
Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange expenses were presented on a gross basis prior to the adoption of ASC 606 and are presented on a net basis. The 2018 income for this item was originally reported on a gross basis, but is presented net of $2.6 million in interchange expenses in these financial statements. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, ATM surcharge fees, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Commissions from the sale of insurance and financial products: The Company earns commissions from the sale of insurance policies and wealth management products.
Insurance income generally consists of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Company recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance company and the policyholder. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Performance-based commissions from insurance companies are recognized at a point in time as policies are sold.
Wealth Management Income primarily consists of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the financial product. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company also earns some fees from asset management, which is billed quarterly for services rendered in the most recent period, for which the performance obligation has been satisfied.
SBA Consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees are based on a percentage of the dollar amount of the originated loans and are recorded when the performance obligation has been satisfied. During 2020, the Company's SBA subsidiary assisted its third-party clients in the origination of PPP loans and charged and received fees for doing so. For several clients, the forgiveness piece of the PPP process, which will occur at a future time, was included in the fees charged. Accordingly, the Company recorded deferred revenue for approximately one-half of the fees received, which amounted to $1.6 million. During 2020, the Company realized approximately $0.2 million of this deferred revenue related to fulfilling a portion of the forgiveness services. At December 31, 2020, the remaining amount of deferred revenue was $1.4 million. These fees will be recorded as income in the period in which the services associated with the forgiveness process are rendered.
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.
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 and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, 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, 2020, 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 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates 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 the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses
As described in Notes 1 and 4 to the Company's consolidated financial statements, the Company had a gross loan portfolio of approximately $4.7 billion and related allowance for loan losses of approximately $52.4 million as of December 31, 2020. The allowance for loan losses includes a reserve for loans collectively evaluated for impairment of approximately $45.7 million and loans individually evaluated for impairment of approximately $6.7
million. In calculating the collectively evaluated component of the allowance for loan losses, management considers both quantitative and qualitative loss factors. The evaluation of the qualitative loss factors involves subjective estimates and assumptions, which require a high degree of management’s judgment. These estimates and assumptions are affected by changes in loan volume, evaluation of the loan portfolio, current economic conditions (including the impact of COVID-19), historical loan loss experience and other risk factors.
We identified management’s evaluation of the qualitative loss factors within the collectively evaluated component of the allowance for loan losses as a critical audit matter. Management’s assessment of the qualitative loss factors for collectively evaluated loans requires significant judgments related to current economic conditions, specifically local, state, and national economic outlooks (including the impact of COVID-19), trends in loan volume, mix and size of loans, levels and trends of delinquencies, industry concentrations, changes in property values, and credit administration practices. Auditing these judgments and assumptions involved especially challenging auditor judgment due to the nature and extent of effort required, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Testing the design and operating effectiveness of internal controls over management’s review of the qualitative risk factors, and the resulting reserve for loans collectively evaluated for impairment, including controls related to: (i) the accuracy of data inputs used in the determination of adjustments made to the qualitative loss factors, and (ii) management’s review of the conclusions reached related to the qualitative loss factors and the resulting allocation to the allowance.  
•Assessing the reasonableness of management’s assumptions related to current economic conditions (including the impact of COVID-19), evaluation of the loan portfolio and other risk factors used in identifying the qualitative risk factors for collectively evaluated loans and determining whether such assumptions were relevant, reliable, and reasonable for the purpose used.
•Evaluating the reasonableness of assumptions and data used by management in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2019.
Raleigh, North Carolina
February 26, 2021
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, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of First Bancorp and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Raleigh, North Carolina
February 26, 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of First Bancorp
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for the year ended December 31, 2018, and the related notes to the consolidated financial statements (collectively, the financial statements) of First Bancorp and its subsidiaries (the Company). In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations of the Company and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Elliott Davis, PLLC
We served as the Company's auditor from 2005 to 2019.
Charlotte, North Carolina
March 1, 2019

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with the SEC is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is communicated to our management to allow timely decisions regarding required disclosure. Based on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in allowing timely decisions regarding disclosure to be made about material information required to be included in our periodic reports with the SEC.
Management’s Report On Internal Control Over Financial Reporting
Management of First Bancorp and its subsidiaries (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on Management’s evaluation under the framework in Internal Control - Integrated Framework, management of the Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2020.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Management is also responsible for the preparation and fair presentation of the consolidated financial statements and other financial information contained in this report. The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management.
BDO USA, LLP, an independent, registered public accounting firm, has audited the Company’s consolidated financial statements as of and for the year ended December 31, 2020, and audited the Company’s effectiveness of internal control over financial reporting as of December 31, 2020, as stated in their report, which is included in Item 8 hereof.
Changes in Internal Controls
There were no changes in our internal control over financial reporting that occurred during, or subsequent to, the fourth quarter of 2020 that were reasonably likely to materially affect our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not applicable.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Incorporated herein by reference is the information under the captions “Executive Compensation” and “Board Committees, Attendance and Compensation” from the Company’s definitive proxy statement to be filed pursuant to Regulation 14A.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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, 2020, 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, 2020 regarding shares of the Company’s stock that may be issued pursuant to the Company’s equity-based compensation plan. At December 31, 2020, the Company had no warrants or stock appreciation rights outstanding under any compensation plans.
As of December 31, 2020
(a) (b) (c)
Plan category Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights Weighted-average
exercise price of
outstanding options,
warrants and rights Number of securities available for
future issuance under equity
compensation plans (excluding
securities reflected in column (a))
Equity compensation plans approved by security holders (1) - $ - 549,876
Equity compensation plans not approved by security holders - - -
Total - $ - 549,876
_________________
(1) Consists of the Company’s 2014 Equity Plan, which is currently in effect.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
Incorporated herein by reference is the information under the caption “Audit Committee Report” from the Company’s definitive proxy statement to be filed pursuant to Regulation 14A.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements - See Item 8 and the Cross Reference Index on page 3 for information concerning the Company’s consolidated financial statements and report of independent auditors.
2. Financial Statement Schedules - not applicable
3. Exhibits
The following exhibits are filed with this report or, as noted, are incorporated by reference. Except as noted below the exhibits identified have SEC File No. 000-15572. Management contracts, compensatory plans and arrangements are marked with an asterisk (*).
2.a Purchase and Assumption Agreement dated as of March 3, 2016 between First Bank (as Seller) and First Community Bank (as Purchaser) was filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on March 7, 2016, and is incorporated herein by reference.
2.b Purchase and Assumption Agreement dated as of March 3, 2016 between First Community Bank (as Seller) and First Bank (as Purchaser) was filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on March 7, 2016, and is incorporated herein by reference.
2.c Merger Agreement between First Bancorp and Carolina Bank Holdings, Inc. dated June 21, 2016 was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on June 22, 2016, and is incorporated herein by reference.
2.d Merger Agreement between First Bancorp and ASB Bancorp, Inc. dated May 1, 2017 was filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 1, 2017, and is incorporated herein by reference.
3.a Articles of Incorporation of the Company and amendments thereto were filed as Exhibits 3.a.i through 3.a.v to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibits 3.1 and 3.2 to the Company’s Current Report on Form 8-K filed on January 13, 2009, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1.b to the Company’s Registration Statement on Form S-3D filed on June 29, 2010 (Commission File No. 333-167856), and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 6, 2011, and are incorporated herein by reference. Articles of Amendment to the Articles of Incorporation were filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 26, 2012, and are incorporated herein by reference.
3.b Amended and Restated Bylaws of the Company were filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed on February 9, 2018, and are incorporated herein by reference.
4.a Form of Common Stock Certificate was filed as Exhibit 4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference.
4.b Description of the Company's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
10.a Form of Indemnification Agreement between the Company and its Directors and Officers was filed as Exhibit 10.a to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and is incorporated herein by reference.
10.b First Bancorp Senior Management Supplemental Executive Retirement Plan was filed as Exhibit 10.b to the Company's Annual Report on Form 10-K for the year ended December 31, 2018, and is incorporated herein by reference. (*)
10.c First Bancorp 2007 Equity Plan was filed as Appendix B to the Registrant's Form Def 14A filed on March 27, 2007, and is incorporated herein by reference. (*)
10.d First Bancorp 2014 Equity Plan was filed as Appendix B to the Registrant’s Form Def 14A filed on April 4, 2014, and is incorporated herein by reference. (*)
10.e First Bancorp Long Term Care Insurance Plan was filed as Exhibit 10(o) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and is incorporated by reference. (*)
10.f Advances and Security Agreement with the Federal Home Loan Bank of Atlanta dated February 15, 2005 was attached as Exhibit 99(a) to the Company’s Current Report on Form 8-K filed on February 22, 2005, and is incorporated herein by reference.
10.g Form of Stock Option and Performance Unit Award Agreement was filed as Exhibit 10 to the Company’s Current Report on Form 8-K filed on June 23, 2008, and is incorporated herein by reference. (*)
10.h Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K was filed as Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as is incorporated herein by reference. (*)
10.i 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. (*)
10.j Employment Agreement between the Company and Richard H. Moore dated August 28, 2012 was filed as Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, and is incorporated herein by reference. Amendments to this agreement were filed in the Company’s Current Reports on Form 8-K filed on March 9, 2017 and February 9, 2018 and are incorporated herein by reference. (*)
10.k Employment Agreement between the Company and Michael G. Mayer dated March 10, 2014 was filed as Exhibit 10.z to the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and is incorporated herein by reference. (*)
10.l Amendment to the First Bancorp Senior Management Supplemental Executive Retirement Plan dated March 11, 2014 was filed as Exhibit 10.aa to the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and is incorporated herein by reference. (*)
10.m Employment Agreement between the Company and Eric P. Credle dated November 7, 2014 was filed as Exhibit 10.a to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, and is incorporated herein by reference. (*)
10.n The Executive Nonqualified Excess Plan Document was filed as Exhibit 10.q to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and is incorporated herein by reference. (*)
10.o The Executive Nonqualified Excess Plan Adoption Agreement dated January 30, 2017 was filed as Exhibit 10.r to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and is incorporated herein by reference. (*)
10.p The Executive Nonqualified Excess Plan Adoption Agreement dated February 26, 2018 was filed as Exhibit 10.s to the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and is incorporated herein by reference. (*)
10.q The Company’s Annual Incentive Plan for certain employees and executive officers
21 List of Subsidiaries of Registrant
23.1 Consent of Independent Registered Public Accounting Firm, Elliott Davis, PLLC
23.2 Consent of Independent Registered Public Accounting Firm, BDO USA, LLP
31.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, 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.
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(b) Exhibits - see (a)(3) above.
(c) No financial statement schedules are filed herewith.
Copies of exhibits are available upon written request to: First Bancorp, Elizabeth B. Bostian, Secretary, 300 SW Broad Street, Southern Pines, North Carolina, 28387.