First Bank(FBNC) - 2019 Q4 - Annual Report

PART I Item 1. Business First Bancorp, a major NC bank holding company, operates 101 branches providing banking, insurance, and financial planning services, with an active acquisition strategy First Bancorp Key Financials (as of December 31, 2019) | Metric | Amount ($ millions) | | :--------------- | :------------------ | | Total Assets | 6,100 | | Total Loans | 4,500 | | Total Deposits | 4,900 | | Shareholders' Equity | 900 | - First Bancorp operates 101 branches, with 95 in North Carolina and 6 in South Carolina, serving a geographical area from Florence, SC to Asheville, NC[13] - The company's wholly-owned subsidiaries include First Bank Insurance Services, Inc. (property and casualty insurance), SBA Complete, Inc. (SBA loan consulting), and First Troy SPE, LLC (holding entity for foreclosed properties)[14] General Description First Bancorp, incorporated in North Carolina in 1983, is the state's fourth largest bank holding company - First Bancorp, incorporated in North Carolina on December 8, 1983, is the fourth largest bank holding company headquartered in North Carolina[11][12] - As of December 31, 2019, the Company had total consolidated assets of $6.1 billion, total loans of $4.5 billion, total deposits of $4.9 billion, and shareholders' equity of $0.9 billion[11] General Business The company offers a comprehensive suite of banking activities, including diverse deposit and loan products, alongside insurance and financial planning services - The company engages in a full range of banking activities, including deposit products (checking, savings, money market, time deposits, IRAs) and various loan types (business, real estate, personal, home improvement, automobiles, residential mortgages, SBA loans)[16][18] - Ancillary services include property and casualty insurance through First Bank Insurance, and non-FDIC insured investment and insurance products (mutual funds, annuities, long-term care, life insurance, retirement plans) and financial planning through FB Wealth Management Services[19] Territory Served and Competition Headquartered in Southern Pines, NC, the company operates across North and South Carolina, facing intense competition from diverse financial service providers - The company's headquarters are in Southern Pines, Moore County, North Carolina, with operations across North Carolina and northeastern South Carolina[22] Deposit Market Share in Key Counties (as of June 30, 2019) | County, State | Number of Branches | Deposits (in millions) | Market Share | | :--------------- | :----------------- | :--------------------- | :----------- | | Moore, NC | 10 | $538 | 33.1% | | Montgomery, NC | 2 | $122 | 40.5% | | Lee, NC | 3 | $222 | 24.7% | | Dillon, SC | 3 | $68 | 21.7% | | Robeson, NC | 4 | $209 | 20.1% | | Duplin, NC | 3 | $173 | 19.5% | | McDowell, NC | 1 | $71 | 19.2% | | Scotland, NC | 1 | $98 | 21.9% | | Madison, NC | 1 | $43 | 43.8% | - The company faces intense competition from large interstate bank holding companies with greater resources, as well as smaller local banks and a wide range of financial service providers including credit unions, investment firms, and internet banks[27][28] - Competitive advantages include being large enough to absorb higher regulatory and technology costs compared to smaller banks, while maintaining a personal, local banking culture that appeals to retail and small business customers[29] Lending Policy and Procedures The Bank maintains conservative lending policies, rigorous underwriting, continuous portfolio monitoring, and independent loan reviews to ensure asset quality - The Bank prioritizes conservative lending policies and appropriate underwriting standards, with loan approval authorities varying by officer experience and loan type, up to $50 million for the President and Chief Credit Officer jointly[31] - Loan portfolio quality is continually monitored, with individual lending officers responsible for early-stage collections and the Asset Resolution Group managing loans exceeding established past due parameters[33] - An internal Loan Review Department conducts ongoing reviews, and an independent consulting firm provides secondary reviews to assess adherence to policies and risk grades[34][35] Investment Policy and Procedures The investment policy aims to maximize income from excess funds while maintaining liquidity and risk objectives, primarily through investment-grade securities - The investment policy aims to maximize income from excess funds while maintaining liquidity and risk objectives, allowing investments in U.S. government securities, mortgage-backed securities, municipal obligations, and limited corporate bonds[36] - Securities must generally be investment grade (Moody's BAA or S&P BBB or higher), with corporate bonds not exceeding 15% of the portfolio and subject to due diligence[37][39] - The Chief Investment Officer implements the policy and reports to the Investment Committee, which reviews activity quarterly, and the Board of Directors approves the policy annually and evaluates interest rate risk[40] Mergers and Acquisitions The company actively pursues an acquisition strategy to expand into new markets and product offerings, evaluating targets based on financial impact and strategic fit - The company actively pursues an acquisition strategy, categorized into acquiring financial institutions/branches within existing or contiguous markets, or companies offering new products/services[41] - Recent acquisitions include Bankingport, Inc. (insurance agency, 2016), SBA Complete (SBA loan consulting, 2016), a branch exchange in Virginia/North Carolina (2016), Carolina Bank Holdings, Inc. (2017), Bear Insurance Services (2017), and ASB Bancorp, Inc. (2017)[45][46][49][50][51][52] - Key factors for evaluating acquisitions include projected impact on earnings per share, capital, book value, tangible book value, estimated future earnings, credit losses, cost efficiencies, and interest rates[53] Employees As of December 31, 2019, the company employed 1,065 full-time and 46 part-time staff, maintaining positive employee relations without collective bargaining agreements - As of December 31, 2019, the company had 1,065 full-time and 46 part-time employees, with good employee relations and no collective bargaining agreements[55] Supervision and Regulation First Bancorp and First Bank are subject to comprehensive supervision and examination by the Federal Reserve and the North Carolina Office of the Commissioner of Banks - First Bancorp is regulated by the Federal Reserve and the North Carolina Office of the Commissioner of Banks as a bank holding company, and First Bank is also subject to their supervision and examination[56][57] Supervision and Regulation of the Company The Federal Reserve regulates First Bancorp, requiring reports, approving acquisitions, mandating capital levels, and restricting cash dividends to ensure financial stability - The Federal Reserve requires quarterly reports, approval for certain acquisitions, and mandates capital levels, with authority to take enforcement actions for unsafe practices or violations[58] - Cash dividends are restricted if they would unduly pressure subsidiary bank capital or be funded by borrowing, requiring net income sufficiency and consistent earnings retention[60] Supervision and Regulation of the Bank First Bank, as a state-chartered institution, is regulated by the North Carolina Commissioner of Banks and Federal Reserve, with dividend payments subject to strict capital and safety requirements - As a state-chartered bank, First Bank is regulated by the North Carolina Commissioner of Banks, covering mergers, dividends, loans to insiders, recordkeeping, and branch establishment[65] - Dividends from the Bank to the Company are subject to North Carolina law and Federal Reserve regulations, prohibiting payment if the Bank would fall below 'well-capitalized' status or if it's deemed an unsafe practice[66] FDIC Insurance First Bank's deposits are FDIC insured up to $250,000, with the bank paying quarterly assessments, and received significant assessment credits in 2019 - First Bank's deposits are FDIC insured up to applicable limits ($250,000), with the bank paying quarterly statutory assessments based on assets, capital, and supervisory ratings[68][69] FDIC Insurance Expense | Year | Expense ($ millions) | | :--- | :------------------- | | 2019 | 0.3 | | 2018 | 2.3 | | 2017 | 2.4 | - In 2019, the company received $1.35 million in assessment credits due to the Deposit Insurance Fund (DIF) reserve ratio exceeding 1.35%, leading to a significant reduction in FDIC insurance expense for the year[71] Legislative and Regulatory Guidance and Developments New legislation and regulatory amendments from federal agencies can significantly impact the company's operations and financial condition - New legislation and amendments to regulations by federal agencies (Federal Reserve, FDIC, SEC) can impact the company's operations and financial condition[73] Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 The Dodd-Frank Act introduced significant regulatory changes, with subsequent modifications by the Economic Growth Act, though the company prefers Basel III standards - The Dodd-Frank Act (2010) introduced significant regulatory and compliance changes, including enhanced authority over troubled banks, increased capital/liquidity requirements, and restrictions on banking activities[74] - The Economic Growth, Regulatory Relief and Consumer Protection Act (2018) modified some Dodd-Frank rules, expanding qualified mortgages and proposing an alternative Community Bank Leverage Ratio (9%) for institutions under $10 billion in assets[76][77] - The company does not expect to opt-in to the Community Bank Leverage Ratio, preferring to continue using Basel III standards[79] Regulatory Capital Requirement under Basel III The company is subject to Basel III capital rules, including minimum ratios and a capital conservation buffer, and is currently classified as well-capitalized - Effective January 1, 2015, the company became subject to Basel III capital rules, which include minimum capital ratios and a capital conservation buffer phased in to 2.5% by January 1, 2019[81][82] Minimum Capital Ratios under Basel III (Effective Jan 1, 2019) | Ratio | Minimum Requirement | | :---------------------------------- | :------------------ | | CET1 to risk-weighted assets | 7.0% | | Tier I capital to risk-weighted assets | 8.5% | | Total capital to risk-weighted assets | 10.5% | | Tier I leverage ratio | 4.0% | - To be classified as 'well capitalized,' specific guidelines include a 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%. First Bank is currently well-capitalized[82][84] Current Expected Credit Loss Accounting Standard The CECL accounting standard, effective January 1, 2020, will significantly increase the allowance for credit losses upon adoption - The CECL accounting standard, effective January 1, 2020, requires earlier recognition of credit losses over the life of financial assets, impacting the allowance for credit losses[85] - Upon adoption, the company expects its allowance for credit losses to increase from approximately $21 million (Dec 31, 2019) to $40-$44 million, with the initial impact reflected as a cumulative-effect adjustment to retained earnings[85] Liquidity Requirements Basel III liquidity tests, such as LCR and NSFR, are designed to ensure adequate liquid assets and stable funding, but do not currently apply to the company due to its size - Basel III includes liquidity tests like the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to ensure adequate liquid assets and stable funding, though these specific requirements do not currently apply to the company due to its size[87][88][89] Financial Privacy and Cybersecurity Federal regulations mandate financial privacy and robust cybersecurity controls to protect consumer information and ensure business continuity against cyber threats - Federal banking regulations limit disclosure of non-public consumer information and require privacy policies, affecting how data is shared with third parties and affiliates[90][91] - Regulators emphasize robust cybersecurity controls, business continuity planning for cyber-attacks, and data recovery processes. The company employs layered security but acknowledges ongoing threats[92][93] Anti-Money Laundering and the USA Patriot Act The USA PATRIOT Act and FinCEN's AML rules impose significant compliance obligations on financial institutions, with non-compliance leading to severe penalties and reputational damage - The USA PATRIOT Act and FinCEN's AML rules impose significant compliance and due diligence obligations on financial institutions, including identifying beneficial owners of legal entities opening new accounts[94][95] - Failure to comply with AML/terrorist financing programs can lead to severe legal and reputational consequences, including fines and restrictions on mergers/acquisitions[96][98] Office of Foreign Assets Control Regulation The company must comply with OFAC economic sanctions, as non-compliance can result in legal and reputational harm, and impact merger/acquisition approvals - The company must comply with economic sanctions administered by OFAC, with non-compliance potentially leading to legal and reputational harm, and restrictions on merger/acquisition approvals[99] Community Reinvestment Act The CRA requires depository institutions to address credit needs in their communities, particularly for low- and moderate-income areas, with First Bank receiving a 'satisfactory' rating - The CRA requires depository institutions to meet credit needs in their market areas, especially for low- and moderate-income individuals and communities. First Bank received a 'satisfactory' rating in its most recent CRA examination[100] Federal Securities Laws As a NASDAQ-listed public company, First Bancorp is subject to extensive SEC regulations, including reporting, disclosure, proxy solicitation, and insider trading rules - As a public company listed on NASDAQ, First Bancorp is subject to SEC reporting, disclosure, proxy solicitation, and insider trading regulations under the Exchange Act, as well as Sarbanes-Oxley and Dodd-Frank requirements[101] Tax Cuts and Jobs Act The Tax Cuts and Jobs Act of 2017 significantly reduced the U.S. statutory tax rate, impacting the company's deferred tax balances and effective tax rate - The Tax Cuts and Jobs Act (2017) reduced the U.S. statutory tax rate from 35% to 21% starting January 1, 2018, impacting the company's deferred tax balances and effective tax rate[102][103] Item 1A. Risk Factors Investing in First Bancorp common stock involves risks from economic conditions, cybersecurity, loan losses, extensive regulation, and stock price volatility - Unfavorable economic conditions in the company's primary markets (North Carolina and parts of South Carolina) could materially impact operations, financial condition, and cash flows[108] - Cybersecurity incidents pose a risk of data loss, business disruption, reputational damage, and increased costs, despite comprehensive preventative measures[109][110] - The adoption of the CECL accounting standard (effective Jan 1, 2020) is expected to significantly increase the allowance for loan losses (from ~$21 million to $40-$44 million) and may lead to more volatile provisions for credit losses[111][116][117] Risks Related to Our Business The company faces business risks from extensive regulation, potential noncompliance with AML laws, integration challenges from future acquisitions, and the transition from LIBOR - The company is subject to extensive regulation by the Commissioner and Federal Reserve, which can impose restrictions on operations and impact financial results[118][119] - Noncompliance with Bank Secrecy Act and anti-money laundering regulations could lead to significant civil penalties, regulatory actions, and reputational damage[121][123] - Future acquisitions may dilute stock ownership, expose the company to integration risks, and face delays or conditions from regulatory approvals[127][128][131] - The transition from LIBOR as a reference rate could create considerable costs and risks for loans and borrowings, potentially impacting reputation if not managed effectively[149][150] Risks Related to the Company's Common Stock Investment in the company's common stock carries risks including uncertain dividend payments, price volatility, and the inherent market risk of uninsured deposits - There is no assurance of continued cash dividend payments, as future payments depend on financial condition, results of operations, capital requirements, and economic conditions[177] - The company's stock price can be volatile due to various factors, and significant sales or the perception of sales could cause a decline[179][181] - Investment in the company's common stock is not an insured deposit and carries inherent market risks, potentially leading to loss of investment[182] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - The company has no unresolved staff comments[183] Item 2. Properties First Bancorp's main offices are in Southern Pines, NC, with operational divisions in Troy and Greensboro, NC, operating 101 bank branches, mostly owned, and deemed adequate for current and future needs - The company's main offices are in Southern Pines, NC, and its Operations Division is primarily housed in buildings in Troy, NC and Greensboro, NC, all owned by the Bank[183] - As of December 31, 2019, the company operated 101 bank branches; 92 were owned (land and/or building), and 9 were leased (land and buildings)[183] Item 3. Legal Proceedings First Bancorp and its subsidiaries are not involved in any legal proceedings deemed material to the company's consolidated financial position, with appropriate reserves accrued for probable losses - No pending or threatened legal proceedings are considered material to the company's consolidated financial position[184] - The company's policy is to establish and accrue appropriate reserves when a loss from legal proceedings is probable and determinable[184] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to First Bancorp - Mine Safety Disclosures are not applicable[185] PART II Item 5. Market for Registrant's Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities First Bancorp's common stock trades on NASDAQ under 'FBNC', with approximately 2,400 shareholders of record, and the company had authorization to repurchase up to $40 million of stock by December 31, 2020, though no shares were repurchased in Q4 2019 - First Bancorp's common stock trades on The NASDAQ Global Select Market under the symbol 'FBNC'[186] - As of December 31, 2019, there were approximately 2,400 shareholders of record and 9,900 shareholders holding stock in 'street name'[186] - The company did not repurchase any shares in Q4 2019. As of December 31, 2019, it had authorization to repurchase up to $40 million of stock by December 31, 2020[191][192] Performance Graph This section presents the company's five-year total return performance compared to market indices, indexed to $100 on December 31, 2014 Five-Year Total Return Performances (Indexed to $100 on Dec 31, 2014) | Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | | :------------------------------------- | :----- | :------ | :------ | :------ | :------ | :------ | | First Bancorp | $100.00 | $103.32 | $151.99 | $199.71 | $186.73 | $231.53 | | Russell 2000 | $100.00 | $95.59 | $115.95 | $132.94 | $118.30 | $148.49 | | SNL Index-Banks ($5B-$10B) | $100.00 | $113.92 | $163.20 | $162.59 | $147.15 | $182.34 | Issuer Purchases of Equity Securities The company had authorization to repurchase up to $40 million of its stock by December 31, 2020, but made no repurchases in Q4 2019 - The company had authorization to repurchase up to $40 million of its stock, announced on November 19, 2019, with an expiration date of December 31, 2020[192] - No shares were repurchased as part of publicly announced plans during the quarter ended December 31, 2019[193] Item 6. Selected Consolidated Financial Data This section refers to Table 1 on page 53 for selected consolidated financial data, providing a historical overview of the company's financial performance and position over the past five years Selected Consolidated Financial Data (2015-2019) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------------------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Income Statement Data ($ thousands) | | | | | | | Interest income | $250,107 | $231,207 | $177,382 | $130,987 | $126,655 | | Interest expense | $33,903 | $23,777 | $12,671 | $7,607 | $6,908 | | Net interest income | $216,204 | $207,430 | $164,711 | $123,380 | $119,747 | | Provision (reversal) for loan losses | $2,263 | $(3,589) | $723 | $(23) | $(780) | | Noninterest income | $59,529 | $58,942 | $49,232 | $26,176 | $20,250 | | Noninterest expense | $157,194 | $156,483 | $145,481 | $107,446 | $99,617 | | Income before income taxes | $116,276 | $113,478 | $67,739 | $42,133 | $41,160 | | Income taxes | $24,230 | $24,189 | $21,767 | $14,624 | $14,126 | | Net income | $92,046 | $89,289 | $45,972 | $27,509 | $27,034 | | Net income available to common shareholders | $92,046 | $89,289 | $45,972 | $27,334 | $26,431 | | Earnings per common share – basic | $3.10 | $3.02 | $1.82 | $1.37 | $1.34 | | Earnings per common share – diluted | $3.10 | $3.01 | $1.82 | $1.33 | $1.30 | | Cash dividends declared – common | $0.54 | $0.40 | $0.32 | $0.32 | $0.32 | | Selected Balance Sheet Data (at year end, $ thousands) | | | | | | | Total assets | $6,143,639 | $5,864,116 | $5,547,037 | $3,614,862 | $3,362,065 | | Total loans | $4,453,466 | $4,249,064 | $4,042,369 | $2,710,712 | $2,518,926 | | Allowance for loan losses | $21,398 | $21,039 | $23,298 | $23,781 | $28,583 | | Intangible assets | $251,585 | $255,480 | $257,507 | $79,475 | $67,171 | | Deposits | $4,931,355 | $4,659,339 | $4,406,955 | $2,947,353 | $2,811,285 | | Borrowings | $300,671 | $406,609 | $407,543 | $271,394 | $186,394 | | Total shareholders' equity | $852,401 | $764,230 | $692,979 | $368,101 | $342,190 | | Ratios | | | | | | | Return on average assets | 1.53% | 1.57% | 1.00% | 0.80% | 0.82% | | Return on average common equity | 11.32% | 12.27% | 8.62% | 7.73% | 8.04% | | Net interest margin (taxable-equivalent) | 4.00% | 4.09% | 4.08% | 4.03% | 4.13% | | Loans to deposits at year end | 90.31% | 91.19% | 91.73% | 91.97% | 89.60% | | Allowance for loan losses to total loans | 0.48% | 0.50% | 0.58% | 0.88% | 1.13% | | Nonperforming assets to total assets at year end | 0.62% | 0.74% | 0.96% | 1.64% | 2.66% | | Net charge-offs (recoveries) to average total loans | 0.04% | (0.03%) | 0.04% | 0.14% | 0.46% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis provides insights into First Bancorp's financial performance and condition for the past three years, highlighting asset growth, stable outlook, and impacts of interest rates and CECL - Net income per diluted common share increased by 3.0% in 2019 to $3.10, primarily due to higher net interest income from asset growth[200][201] - Total assets, loans, and deposits all grew by approximately 5-6% in both 2019 and 2018[200][211][213][222] - The outlook for 2020 is stable, with expected solid organic loan and deposit growth, but challenges from declining net interest margin due to lower interest rates and likely higher provisions for loan losses, especially with CECL adoption[223][224][225] Financial Highlights This section presents key financial metrics for 2019 and 2018, illustrating changes in income, expenses, balance sheet items, and performance ratios Financial Highlights (2019 vs 2018) | Metric ($ thousands) | 2019 | 2018 | Change (%) | | :-------------------------- | :-------- | :-------- | :--------- | | Net interest income | $216,204 | $207,430 | 4.2% | | Provision 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% | | Net income | $92,046 | $89,289 | 3.1% | | Diluted EPS | $3.10 | $3.01 | 3.0% | | Total Assets | $6,143,639| $5,864,116| 4.8% | | Total Loans | $4,453,466| $4,249,064| 4.8% | | Total Deposits | $4,931,355| $4,659,339| 5.8% | | 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% | | Overview - 2019 Compared to 2018 In 2019, net interest income and noninterest income increased, while asset and deposit growth remained strong, leading to a reduction in brokered deposits - Net interest income increased by 4.2% to $216.2 million in 2019, driven by growth in interest-earning assets, despite a decrease in net interest margin from 4.09% to 4.00% due to higher funding costs[202][203] - A provision for loan losses of $2.3 million was recorded in 2019, compared to a negative provision of $3.6 million in 2018, primarily due to higher net charge-offs in 2019[204] - Noninterest income increased by 1.0% to $59.5 million, with growth in service charges on deposits and interchange income, partially offset by lower SBA loan sale gains and consulting fees[205] - Total assets grew by 4.8% to $6.1 billion, loans by 4.8% to $4.5 billion, and deposits by 5.8% to $4.9 billion. Retail deposits grew 9.7%, allowing a 64.1% reduction in brokered deposits[211] Overview - 2018 Compared to 2017 Net income and EPS significantly increased in 2018, driven by acquisitions and cost efficiencies, with stable net interest income and a lower effective tax rate due to tax reform - Net income per diluted common share increased by 65.4% to $3.01 in 2018, primarily due to a full year of earnings and cost efficiencies from the Carolina Bank and Asheville Savings Bank acquisitions in 2017[213][214] - Net interest income increased by 25.9% to $207.4 million, driven by growth in interest-earning assets from the 2017 acquisitions, with a stable net interest margin of 4.09%[218] - A negative provision for loan losses of $3.6 million was recorded in 2018, mainly due to large loan recoveries totaling $3.7 million in Q1 2018[219] - The effective tax rate decreased from 32.1% in 2017 to 21.3% in 2018 due to the Tax Cuts and Jobs Act[222] Outlook for 2020 The company anticipates stable local economies and organic growth in 2020, but expects challenges from declining net interest margin and increased loan loss provisions due to CECL adoption - The company expects stable local economies and solid organic loan and deposit growth in 2020[223] - Challenges to earnings growth include declining net interest margin due to lower interest rates and competitive pressures, and an anticipated increase in provisions for loan losses, especially with the adoption of CECL[224][225] Critical Accounting Policies Critical accounting policies involve significant judgment and estimates, particularly for the allowance for loan losses, intangible assets, and fair value of acquired loans - Critical accounting policies involve significant judgment and estimates, including the allowance for loan losses, intangible assets, and the fair value and discount accretion of acquired loans[227] Allowance for Loan Losses The allowance for loan losses is determined by a mathematical model, with future adjustments possible due to changing conditions and regulatory reviews - The allowance for loan losses is determined by a mathematical model with two components: estimating losses on individually evaluated impaired loans and estimating losses for general reserve loans based on historical losses adjusted for environmental factors[229][230] - Purchased loans are recorded at fair value at acquisition, with uncollectible amounts forming a discount. Subsequent decreases in expected collections result in a provision for loan losses, while increases are accreted into income[231] - Future material adjustments may be necessary due to changes in economic or operational conditions, and regulatory agencies periodically review and may require additions to the allowance[232][233] Intangible Assets Intangible assets from acquisitions are amortized over estimated lives or classified as goodwill, which is annually tested for impairment, with no impairment found in 2019 - Upon acquisition, the excess of purchase price over net assets is recorded as an intangible asset, with identifiable portions (e.g., core deposit intangible, customer lists) amortized over estimated lives (7-15 years) and remaining amounts classified as goodwill[236][237] - Goodwill is tested annually for impairment by comparing the fair value of reporting units to their carrying value. The company has three reporting units: First Bank, First Bank Insurance, and SBA activities[238] - In 2019, the goodwill impairment evaluation concluded no impairment for any reporting unit[239] Fair Value and Discount Accretion of Acquired Loans Acquired loans are recorded at fair value, with discounts accreted into interest income, and expected cash flow estimates are periodically updated to adjust for credit losses or gains - Acquired loans are recorded at initial fair value, generally less than contractual principal due to credit losses and interest rate marks, with the difference being a 'discount'[243] - For non-impaired purchased loans, the discount is accreted into interest income over the loan's life. For purchased credit-impaired (PCI) loans, the accretable yield is recognized over the estimated life using the effective yield method[243][244] - Estimates of expected cash flows are updated periodically; decreases lead to loan loss provisions, while probable increases reverse prior allowances and increase interest income prospectively[245] Merger and Acquisition Activity In 2017, the company completed two full-bank acquisitions and one insurance agency acquisition, expanding its operations and service offerings - In 2017, the company completed two full-bank acquisitions (Carolina Bank and Asheville Savings Bank) and one insurance agency acquisition (Bear Insurance Services)[246] ANALYSIS OF RESULTS OF OPERATIONS Net interest income is the primary earnings driver, complemented by noninterest income, and influenced by loan loss provisions, operating expenses, and income taxes - Net interest income is the largest source of earnings, with other significant factors including provision for loan losses, noninterest income (e.g., service fees), noninterest expenses (e.g., salaries, occupancy), and income taxes[248] Net Interest Income Net interest income increased in 2019 and 2018 due to asset growth, though the net interest margin slightly decreased in 2019 due to higher funding costs Net Interest Income (Tax-Equivalent Basis, $ thousands) | Metric | 2019 | 2018 | 2017 | | :------------------------------------ | :-------- | :-------- | :-------- | | Net interest income, as reported | $216,204 | $207,430 | $164,711 | | Tax-equivalent adjustment | $1,641 | $1,594 | $2,590 | | Net interest income, tax-equivalent | $217,845 | $209,024 | $167,301 | - Net interest income (tax-equivalent) increased by 4.2% in 2019 and 24.9% in 2018, primarily due to growth in interest-earning assets[251][252][254] - The net interest margin decreased from 4.09% in 2018 to 4.00% in 2019, as funding costs increased more than asset yields. In 2018, the margin was stable at 4.09% vs 4.08% in 2017[253][254] Impact of Purchase Accounting Adjustments on Net Interest Income ($ thousands) | Item | 2019 | 2018 | 2017 | | :-------------------------------------------- | :------ | :------ | :------ | | Loan discount accretion on acquired loans | $4,588 | $6,090 | $6,608 | | Loan discount accretion on retained SBA loans | $1,386 | $861 | $234 | | Premium amortization of deposits | $190 | $372 | $384 | | Discount accretion of borrowings | $(181) | $(181) | $(148) | | Total Impact on Net Interest Income | $5,983 | $7,142 | $7,078 | Provision for Loan Losses The provision for loan losses varied significantly, with a negative provision in 2018 due to large recoveries, reflecting strong asset quality and low charge-offs - The provision for loan losses was $2.3 million in 2019, a negative provision of $3.6 million in 2018, and $0.7 million in 2017[263] - The negative provision in 2018 was primarily due to $3.7 million in large loan recoveries. Low provisions in recent years reflect strong asset quality and low charge-offs[263] Total Net Charge-offs (Recoveries) ($ thousands) | Year | Amount ($ thousands) | | :--- | :------------------- | | 2019 | $1,900 | | 2018 | $(1,300) | | 2017 | $1,200 | Noninterest Income Noninterest income saw modest growth in 2019, driven by increased interchange fees and service charges, partially offset by lower SBA loan sale gains Noninterest Income Components ($ thousands) | Item | 2019 | 2018 | 2017 | | :----------------------------------------- | :------ | :------ | :------ | | Service charges on deposit accounts | $12,970 | $12,690 | $11,862 | | Interchange fees (net) | $13,814 | $11,995 | $7,732 | | Other service charges, commissions, and fees | $5,667 | $4,493 | $6,671 | | Fees from presold mortgage loans | $3,944 | $2,735 | $5,695 | | Commissions from sales of insurance and financial products | $8,495 | $8,731 | $5,300 | | SBA consulting fees | $3,872 | $4,675 | $4,024 | | SBA loan sale gains | $8,275 | $10,366 | $5,479 | | Bank-owned life insurance income | $2,564 | $2,534 | $2,321 | | Securities gains (losses), net | $97 | $0 | $(235) | | Other gains (losses), net | $(169) | $723 | $383 | | Total Noninterest Income | $59,529| $58,942| $49,232| - Adjusted noninterest income (excluding securities and other miscellaneous gains/losses) increased by 2.4% in 2019 to $59.6 million and by 18.6% in 2018 to $58.2 million[269] - Interchange fees increased by 15.2% in 2019 to $13.8 million due to increased credit and debit card usage[271] - SBA loan sale gains declined to $8.3 million in 2019 from $10.4 million in 2018 due to natural volatility and lower loan sale premiums[276] Noninterest Expenses Total noninterest expenses remained relatively stable in 2019, with personnel costs rising due to wage increases and hiring, while merger-related and FDIC insurance expenses significantly decreased Noninterest Expenses Components ($ thousands) | Item | 2019 | 2018 | 2017 | | :---------------------------------- | :-------- | :-------- | :-------- | | Salaries | $79,129 | $75,077 | $66,786 | | Employee benefits | $16,844 | $16,888 | $15,313 | | Total personnel expense | $95,973 | $91,965 | $82,099 | | Occupancy expense | $11,122 | $10,793 | $9,661 | | Equipment related expenses | $5,023 | $5,627 | $4,480 | | Merger and acquisition expenses | $192 | $2,358 | $8,073 | | Amortization of intangible assets | $4,858 | $5,917 | $4,033 | | FDIC insurance expense | $344 | $2,333 | $2,350 | | Other operating expenses | $39,087 | $39,258 | $36,604 | | Total Noninterest Expenses | $157,194| $156,483| $145,481| - Total personnel expense increased by 4.4% to $96.0 million in 2019 due to wage increases and hiring, and by 12.0% in 2018 due to acquisitions and SBA lending growth[280][282] - Merger and acquisition expenses significantly decreased to $0.2 million in 2019 from $2.4 million in 2018 and $8.1 million in 2017, reflecting the completion of major acquisition-related activities[285] - FDIC insurance expense decreased to $0.3 million in 2019 due to a $1.3 million assessment credit[287] Income Taxes The company's effective tax rate decreased significantly in 2018 and 2019 due to the Tax Cuts and Jobs Act and state tax rate reductions Income Tax Expense and Effective Tax Rates ($ thousands) | Metric | 2019 | 2018 | 2017 | | :----------------- | :------ | :------ | :------ | | Income tax expense | $24,230 | $24,189 | $21,767 | | Effective tax rate | 20.8% | 21.3% | 32.1% | - The lower effective tax rates in 2019 and 2018 compared to 2017 were primarily due to the Tax Cuts and Jobs Act of 2017, which reduced the federal corporate tax rate from 35% to 21%[290] - North Carolina's state income tax rate for corporations also decreased from 4.0% in 2017 to 2.5% in 2019, further impacting the effective tax rate[291] Stock-Based Compensation Stock-based compensation expense increased in 2019, primarily due to retention-based restricted stock grants to officers Stock-Based Compensation Expense ($ thousands) | Year | Expense ($ thousands) | | :--- | :-------------------- | | 2019 | $2,300 | | 2018 | $1,600 | | 2017 | $1,100 | - The increase in stock-based compensation expense is attributed to retention-based restricted stock grants to officers[293] ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION Total assets increased by 4.8% to $6.1 billion at December 31, 2019, driven by organic growth in loans and deposits - Total assets increased by 4.8% to $6.1 billion at December 31, 2019, with organic growth in loans and deposits[294] Overview The company achieved strong organic loan and deposit growth in 2019 and 2018, significantly reducing brokered deposits and improving asset quality Loan and Deposit Growth (2019 vs 2018, $ thousands) | Category | 2019 Balance at End | 2019 Growth | 2019 % Growth | 2018 Balance at End | 2018 Growth | 2018 % Growth | | :----------------------- | :------------------ | :---------- | :------------ | :------------------ | :---------- | :------------ | | Loans outstanding | $4,453,466 | $204,402 | 4.8% | $4,249,064 | $206,695 | 5.1% | | Total deposits | $4,931,355 | $272,016 | 5.8% | $4,659,339 | $252,384 | 5.7% | | Noninterest-bearing deposits | $1,515,977 | $195,846 | 14.8% | $1,320,131 | $123,970 | 10.4% | | Brokered time deposits | $86,141 | $(153,734) | -64.1% | $239,875 | $216 | 0.1% | - Loan growth in 2019 and 2018 was organic, driven by expansion in high-growth markets, hiring experienced bankers, and increased SBA lending[295] - Strong retail deposit growth in 2019 allowed a significant reduction in brokered deposits and a paydown of borrowings[298] - Nonperforming assets to total assets ratio decreased from 0.74% in 2018 to 0.62% in 2019, reflecting improving credit quality[300] Distribution of Assets and Liabilities The balance sheet mix remained stable, with net loans and deposits forming the largest components, while securities available for sale increased from 2017 to 2019 Distribution of Assets and Liabilities (as of December 31) | Category | 2019 | 2018 | 2017 | | :----------------------------- | :---- | :---- | :---- | | Assets | | | | | Net loans | 72% | 72% | 73% | | Securities available for sale | 13% | 9% | 6% | | Total interest-earning assets | 89% | 90% | 88% | | Liabilities and Shareholders' Equity | | | | | Total deposits | 80% | 79% | 80% | | Borrowings | 5% | 7% | 7% | | Shareholders' equity | 14% | 13% | 12% | - The balance sheet mix remained relatively stable, with net loans consistently comprising 72-73% of total assets and deposits 79-80% of total liabilities and shareholders' equity[302][303] - Securities available for sale increased from 6% of total assets in 2017 to 13% in 2019, funded by excess cash[302] Securities The company increased its securities portfolio in 2018 and 2019, primarily in government agency mortgage-backed securities, resulting in net unrealized gains in 2019 Total Securities ($ thousands) | Year | Amount ($ thousands) | | :--- | :------------------- | | 2019 | $889,877 | | 2018 | $602,588 | | 2017 | $461,773 | - The increase in securities in 2018 and 2019 was due to purchases of fixed-rate securities to realize higher yields and protect against falling interest rates, funded by interest-bearing cash balances[307] - The majority of available-for-sale mortgage-backed securities ($767.3 million in 2019) are issued by government agencies (Freddie Mac, Fannie Mae, Ginnie Mae, SBA)[310] - Net unrealized gains on available-for-sale securities were $9.7 million in 2019, compared to net unrealized losses of $12.4 million in 2018 and $2.2 million in 2017, primarily due to market interest rate fluctuations[312] Loans Loan growth in 2019 and 2018 was organic, driven by market expansion and SBA lending, with real estate mortgage loans consistently dominating the portfolio Loans Outstanding ($ thousands) | Year | Amount ($ thousands) | | :--- | :------------------- | | 2019 | $4,453,466 | | 2018 | $4,249,064 | | 2017 | $4,042,369 | - Loan growth was $204.4 million (4.8%) in 2019 and $206.7 million (5.1%) in 2018, driven by expansion in high-growth markets and SBA lending[320] - Real estate mortgage loans consistently comprise 88-90% of the portfolio. Commercial real estate loans increased to 43% of total loans in 2019, while residential real estate loans declined to 25%[321][323][324] - As of December 31, 2019, 33% of performing loans were variable rate and 67% were fixed rate, consistent with recent years[325] Nonperforming Assets Nonperforming asset levels have steadily declined, reaching 0.62% of total assets in 2019, reflecting improved credit quality and effective resolution strategies Nonperforming Assets ($ thousands) | Metric | 2019 | 2018 | 2017 | | :----------------------------------- | :-------- | :-------- | :-------- | | Nonaccrual loans | $24,866 | $22,575 | $20,968 | | Restructured loans - accruing | $9,053 | $13,418 | $19,834 | | Total nonperforming loans | $33,919 | $35,993 | $40,802 | | Foreclosed properties | $3,873 | $7,440 | $12,571 | | Total nonperforming assets | $37,792 | $43,433 | $53,373 | | Nonperforming assets to total assets | 0.62% | 0.74% | 0.96% | - Nonperforming asset levels have steadily declined over the years, reaching 0.62% of total assets at December 31, 2019, due to improving economic conditions and resolution strategies[331] - Nonaccrual loans increased in 2019, primarily in 'Commercial, financial, and agricultural' and 'Real estate - mortgage - commercial and other' categories, driven by SBA loans[333] - Foreclosed real estate decreased from $12.6 million in 2017 to $3.9 million in 2019 due to increased property sales and improved asset quality[338] Allowance for Loan Losses and Loan Loss Experience The allowance for loan losses is determined by a mathematical model, with net charge-offs fluctuating, and is expected to significantly increase upon CECL adoption in 2020 Allowance for Loan Losses ($ thousands) | Year | Amount ($ thousands) | | :--- | :------------------- | | 2019 | $21,398 | | 2018 | $21,039 | | 2017 | $23,298 | - The allowance for loan losses is based on a mathematical model considering loan growth, net charge-off history, asset quality trends, and specific reserves for deteriorating individual loans[344] - Net loan charge-offs (recoveries) were $1.9 million in 2019, ($1.3 million) in 2018, and $1.2 million in 2017, with the 2018 net recovery driven by full payoffs on previously charged-down loans[346] - The ratio of allowance to total loans declined from 0.58% in 2017 to 0.48% in 2019, partly due to acquisitions where acquired loans were recorded at fair value rather than with an allowance[347] - Upon adoption of CECL on January 1, 2020, the allowance for credit losses is expected to increase to approximately $40-$44 million from $21 million at December 31, 2019[352][356] Deposits Total deposits grew organically in 2019 and 2018, driven by retail deposit growth, which enabled a significant reduction in brokered deposits, maintaining a concentration in transaction accounts Total Deposits ($ thousands) | Year | Amount ($ thousands) | | :--- | :------------------- | | 2019 | $4,931,355 | | 2018 | $4,659,339 | | 2017 | $4,406,955 | - Total deposits increased by 5.8% ($272.0 million) in 2019 and 5.7% ($252.4 million) in 2018, primarily from organic retail deposit growth[359][360] - Retail deposit growth in 2019 allowed a 64.1% reduction in brokered deposits. The deposit mix remains heavily concentrated in transaction and non-time deposit accounts (79% in 2019)[359][362] Deposit Mix (as of December 31) | Deposit Type | 2019 | 2018 | 2017 | | :---------------------------- | :---- | :---- | :---- | | Noninterest-bearing checking | 31% | 28% | 27% | | Interest-bearing checking | 18% | 20% | 20% | | Money market deposits | 24% | 22% | 22% | | Savings deposits | 9% | 9% | 10% | | Time deposits - Brokered | 2% | 5% | 6% | | Time deposits > $100,000 – retail | 11% | 10% | 8% | | Time deposits < $100,000 – retail | 5% | 6% | 7% | | Total deposits | 100%| 100%| 100%| Borrowings Borrowings decreased in 2019 due to deposit growth, with the company maintaining substantial available borrowing capacity from FHLB, a correspondent bank, and the FRB's discount window Borrowings Outstanding ($ thousands) | Year | Amount ($ thousands) | | :--- | :------------------- | | 2019 | $300,671 | | 2018 | $406,609 | | 2017 | $407,543 | - Borrowings decreased by $106 million in 2019, as excess cash from deposit growth was used to pay down debt[368] - As of December 31, 2019, the company had readily available borrowing capacity of approximately $1.05 billion from FHLB, $35 million from a correspondent bank, and $129 million from the FRB's discount window[369] - The company also has $56.7 million in trust preferred security debt outstanding, which qualifies as Tier 1 capital and has quarterly adjustable interest rates tied to LIBOR[374] Liquidity, Commitments, and Contingencies The company maintains stable liquidity through net income, cash, and securities, with substantial outstanding loan commitments and minimal losses from standby letters of credit - Primary liquidity sources include net income, cash, federal funds sold, and the securities portfolio. Overall liquidity remained relatively unchanged in 2019 compared to 2018[377][379] - Liquid assets (cash and securities) as a percentage of total deposits and borrowings were 21.4% at December 31, 2019, compared to 21.0% at December 31, 2018[379] Outstanding Loan Commitments (as of December 31, 2019, $ millions) | Type of Commitment | Fixed Rate | Variable Rate | Total | | :----------------------- | :--------- | :------------ | :---- | | Loan commitments | $264 | $123 | $387 | | Unused lines of credit | $169 | $767 | $936 | | Total | $433 | $890 | $1,323| - Standby letters of credit outstanding were $12.0 million in 2019 and $15.7 million in 2018, with minimal losses incurred[383] Capital Resources and Shareholders' Equity Shareholders' equity increased in 2019 due to net income and comprehensive income, with all regulatory capital ratios significantly exceeding minimum thresholds, and an improved tangible common equity ratio Shareholders' Equity ($ millions) | Year | Amount ($ millions) | | :--- | :------------------ | | 2019 | $852.4 | | 2018 | $764.2 | | 2017 | $693.0 | - Shareholders' equity increased due to net income ($92.0 million in 2019) and other comprehensive income ($17.1 million), partially offset by common stock dividends ($16.0 million) and stock repurchases ($10.0 million)[387] - All regulatory capital ratios significantly exceeded minimum thresholds, with the Tier 1 leverage ratio at 11.19% (vs. 5.00% well-capitalized) and total risk-based capital ratio at 14.89% (vs. 10.00% well-capitalized) at December 31, 2019[393][394] - The tangible common equity to tangible assets (TCE Ratio) improved to 10.20% at December 31, 2019, from 9.07% at December 31, 2018[395] Off-Balance Sheet Arrangements and Derivative Financial Instruments The company has no significant off-balance sheet arrangements beyond letters of credit and trust preferred security guarantees, and does not currently engage in derivative activities - The company has no off-balance sheet arrangements other than letters of credit and repayment guarantees for trust preferred securities[396] - The company has not engaged in significant derivative activities and has no current plans to do so[397] Return on Assets and Equity This section provides key profitability and efficiency ratios, including return on average assets, return on average common equity, and dividend payout ratio Return on Assets and Common Equity | Metric | 2019 | 2018 | 2017 | | :-------------------------------- | :------ | :------ | :------ | | Return on average assets | 1.53% | 1.57% | 1.00% | | Return on average common equity | 11.32% | 12.27% | 8.62% | | Dividend payout ratio – common shares | 17.42% | 13.25% | 17.58% | | Average shareholders' equity to average assets | 13.49% | 12.78% | 11.61% | Interest Rate Risk (Including Quantitative and Qualitative Disclosures About Market Risk – Item 7A.) Net interest income is exposed to interest rate risk, managed through asset/liability strategies, with a consistent net interest margin but potential compression in a flat yield curve environment - Net interest income is exposed to interest rate risk, managed by maintaining balanced asset/liability maturities and repricing opportunities. The net interest margin has been consistent, ranging from 4.00% to 4.13% over the past five years[399] - At December 31, 2019, the company had $1.6 billion more in interest-bearing liabilities subject to interest rate changes within one year than earning assets, suggesting downward pressure on net interest income in a rising rate environment[400] - The company is currently in a 'flat yield curve' environment, which is unfavorable as it narrows the profit spread between loan yields and deposit rates, leading to net interest margin compression[403] - Purchase accounting adjustments, particularly loan discount accretion on acquired loans, significantly impact net interest income and can be volatile due to credit quality and accelerated repayments[404] Inflation Bank performance is more sensitive to interest rate changes than inflation, with high inflation typically leading to growth in assets, loans, deposits, and operating expenses - Bank performance is more affected by changes in interest rates than by inflation, as assets and liabilities are primarily monetary[408] - During high inflation, banks typically experience above-average growth in assets, loans, and deposits, alongside increased operating expenses[408] Current Accounting Matters The company's financial statements adhere to GAAP, and new FASB rules or proposals may materially impact reporting, potentially requiring retroactive application or cumulative charges - The company's financial statements conform to GAAP, and new FASB rules or proposals can materially impact reporting, sometimes requiring retroactive application or cumulative charges to retained earnings[409] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Interest Rate Risk' discussion within Item 7 for quantitative and qualitative disclosures about market risk, indicating no separate content here - Information responsive to this item is found in Item 7 under the caption 'Interest Rate Risk'[410] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements of First Bancorp and its subsidiaries for the years ended December 31, 2019, 2018, and 2017, including balance sheets, income statements, comprehensive income, shareholders' equity, and cash flows, along with detailed notes to the financial statements and independent auditor reports - The consolidated financial statements include the accounts of First Bancorp and its wholly owned subsidiary First Bank, along with its subsidiaries First Bank Insurance Services, Inc., SBA Complete, Inc., and First Troy SPE, LLC[479] - The financial statements are prepared in conformity with U.S. GAAP and involve management estimates and assumptions, particularly for allowance for loan losses, intangible assets, and fair value of acquired loans[481] - BDO USA, LLP audited the consolidated financial statements for 2019 and expressed an unqualified opinion, also affirming the effectiveness of internal control over financial reporting[792][793][807] Consolidated Balance Sheets This section presents the consolidated balance sheets for First Bancorp as of December 31, 2019 and 2018, detailing assets, liabilities, and shareholders' equity Consolidated Balance Sheets (as of December 31, $ thousands) | Asset/Liability Category | 2019 | 2018 | | :----------------------------------- | :---------- | :---------- | | Cash and due from banks, noninterest-bearing | $64,519 | $56,050 | | Due from banks, interest-bearing | $166,783 | $406,848 | | Securities available for sale | $821,945 | $501,351 | | Securities held to maturity | $67,932 | $101,237 | | Loans, net | $4,432,068 | $4,228,025 | | Goodwill | $234,368 | $234,368 | | Other intangible assets | $17,217 | $21,112 | | Total assets | $6,143,639 | $5,864,116 | | Noninterest-bearing checking accounts | $1,515,977 | $1,320,131 | | Interest-bearing checking accounts | $912,784 | $916,374 | | Money market accounts | $1,173,107 | $1,035,523 | | Savings accounts | $424,415 | $432,389 | | Time deposits of $100,000 or more | $649,947 | $690,922 | | Other time deposits | $255,125 | $264,000 | | Total deposits | $4,931,355 | $4,659,339 | | Borrowings | $300,671 | $406,609 | | Total liabilities | $5,291,238 | $5,099,886 | | Total shareholders' equity | $852,401 | $764,230 | Consolidated Statements of Income This section presents the consolidated statements of income for First Bancorp for the years ended December 31, 2019, 2018, and 2017, detailing revenues, expenses, and net income Consolidated Statements of Income (Years Ended December 31, $ thousands) | Income/Expense Category | 2019 | 2018 | 2017 | | :----------------------------------- | :---------- | :---------- | :---------- | | Interest and fees on loans | $220,784 | $208,609 | $163,738 | | Total interest income | $250,107 | $231,207 | $177,382 | | Total interest expense | $33,903 | $23,777 | $12,671 | | Net interest income | $216,204 | $207,430 | $164,711 | | Provision (reversal) for loan losses | $2,263 | $(3,589) | $723 | | Total noninterest income | $59,529 | $58,942 | $49,232 | | Total noninterest expenses | $157,194 | $156,483 | $145,481 | | Income before income taxes | $116,276 | $113,478 | $67,739 | | Income tax expense | $24,230 | $24,189 | $21,767 | | Net income | $92,046 | $89,289 | $45,972 | | Earnings per common share: Basic | $3.10 | $3.02 | $1.82 | | Earnings per common share: Diluted | $3.10 | $3.01 | $1.82 | | Dividends declared per common share | $0.54 | $0.40 | $0