UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

 

Commission File Number 0-15572

 

                         FIRST BANCORP                         

(Exact Name of Registrant as Specified in its Charter)

 

North Carolina		56-1421916
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)
300 SW Broad St., Southern Pines, North Carolina		28387
(Address of Principal Executive Offices)		(Zip Code)
(Registrant's telephone number, including area code)		(910) 246-2500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x YES o NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x YES o NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

o Large Accelerated Filer    x Accelerated Filer    o Non-Accelerated Filer    o Smaller Reporting Company

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter. o Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO

 

The number of shares of the registrant's Common Stock outstanding on July 31, 2017 was 24,678,295.

 

INDEX

FIRST BANCORP AND SUBSIDIARIES

 

	Page
Part I.  Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 2017 and June 30, 2016 (With Comparative Amounts at December 31, 2016)	4
Consolidated Statements of Income -  For the Periods Ended June 30, 2017 and 2016	5
Consolidated Statements of Comprehensive Income - For the Periods Ended June 30, 2017 and 2016	6
Consolidated Statements of Shareholders’ Equity - For the Periods Ended June 30, 2017 and 2016	7
Consolidated Statements of Cash Flows - For the Periods Ended June 30, 2017 and 2016	8
Notes to Consolidated Financial Statements	9
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition	40
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	57
Item 4 – Controls and Procedures	59
Part II.  Other Information
Item 1 – Legal Proceedings	59
Item 1A – Risk Factors	59
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 6 – Exhibits	60
Signatures	62

 

 

FORWARD-LOOKING STATEMENTS

 

Part I of this report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Further, forward-looking statements are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” or other statements concerning our opinions or judgment about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about factors that could affect the matters discussed in this paragraph, see the “Risk Factors” section of our 2016 Annual Report on Form 10-K.

 

Part I. Financial Information

Item 1 - Financial Statements

First Bancorp and Subsidiaries

Consolidated Balance Sheets

 

($ in thousands-unaudited)		June 30, 2017				December 31, 2016 (audited)				June 30, 2016
ASSETS
Cash and due from banks, noninterest-bearing		$	80,234				71,645				58,956
Due from banks, interest-bearing			337,326				234,348				189,404
Federal funds sold			—				—				143
Total cash and cash equivalents			417,560				305,993				248,503
Securities available for sale			207,496				199,329				219,762
Securities held to maturity (fair values of $129,697, $130,195, and $146,099)			127,866				129,713				142,073
Presold mortgages in process of settlement			13,071				2,116				4,104
Loans – non-covered			3,375,976				2,710,712				2,519,747
Loans – covered by FDIC loss share agreement			—				—				78,387
Total loans			3,375,976				2,710,712				2,598,134
Allowance for loan losses			(24,025	)			(23,781	)			(26,023	)
Net loans			3,351,951				2,686,931				2,572,111
Premises and equipment			96,605				75,351				76,991
Accrued interest receivable			10,830				9,286				9,152
FDIC indemnification asset			—				—				5,157
Goodwill			139,124				75,042				73,541
Other intangible assets			12,132				4,433				3,612
Foreclosed real estate			11,196				9,532				10,606
Bank-owned life insurance			87,501				74,138				73,098
Other assets			53,288				42,998				27,836
Total assets		$	4,528,620				3,614,862				3,466,546
LIABILITIES
Deposits:   Noninterest bearing checking accounts		$	990,004				756,003				709,887
Interest bearing checking accounts			728,973				635,431				636,316
Money market accounts			782,963				685,331				639,849
Savings accounts			411,814				209,074				197,445
Time deposits of $100,000 or more			479,839				422,687				412,564
Other time deposits			250,737				238,827				275,959
Total deposits			3,644,330				2,947,353				2,872,020
Borrowings			355,405				271,394				206,394
Accrued interest payable			1,014				539				586
Other liabilities			27,220				27,475				25,932
Total liabilities			4,027,969				3,246,761				3,104,932
Commitments and contingencies
SHAREHOLDERS’ EQUITY
Preferred stock, no par value per share.  Authorized: 5,000,000 shares
Series C, convertible, issued & outstanding:  none, none, and 728,706 shares			—				—				7,287
Common stock, no par value per share.  Authorized: 40,000,000 shares
Issued & outstanding:  24,678,295, 20,844,505, and 20,087,942 shares			262,901				147,287				139,832
Retained earnings			240,682				225,921				216,223
Stock in rabbi trust assumed in acquisition			(4,257	)			—				—
Rabbi trust obligation			4,257				—				—
Accumulated other comprehensive income (loss)			(2,932	)			(5,107	)			(1,728	)
Total shareholders’ equity			500,651				368,101				361,614
Total liabilities and shareholders’ equity		$	4,528,620				3,614,862				3,466,546

 

See accompanying notes to consolidated financial statements.

First Bancorp and Subsidiaries

Consolidated Statements of Income

 

($ in thousands, except share data-unaudited)		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
INTEREST INCOME
Interest and fees on loans		$	39,656				30,809				73,359				60,382
Interest on investment securities:
Taxable interest income			2,002				1,961				3,826				3,784
Tax-exempt interest income			427				432				870				877
Other, principally overnight investments			742				177				1,240				399
Total interest income			42,827				33,379				79,295				65,442
INTEREST EXPENSE
Savings, checking and money market accounts			685				409				1,207				803
Time deposits of $100,000 or more			874				622				1,588				1,274
Other time deposits			173				255				339				529
Borrowings			1,179				555				1,949				1,103
Total interest expense			2,911				1,841				5,083				3,709
Net interest income			39,916				31,538				74,212				61,733
Provision for loan losses – non-covered			—				489				723				2,109
Provision (reversal) for loan losses – covered			—				(770	)			—				(2,132	)
Total provision (reversal) for loan losses			—				(281	)			723				(23	)
Net interest income after provision (reversal) for loan losses			39,916				31,819				73,489				61,756
NONINTEREST INCOME
Service charges on deposit accounts			2,966				2,565				5,580				5,250
Other service charges, commissions and fees			3,554				3,043				6,727				5,873
Fees from presold mortgage loans			1,511				410				2,279				781
Commissions from sales of insurance and financial products			1,038				937				1,878				1,875
SBA consulting fees			1,050				720				2,310				720
SBA loan sale gains			927				—				1,549				—
Bank-owned life insurance income			580				504				1,088				1,012
Foreclosed property gains (losses), net			(248	)			(133	)			(223	)			77
FDIC indemnification asset income (expense), net			—				(2,178	)			—				(4,544	)
Securities gains (losses), net			—				—				(235	)			3
Other gains (losses), net			497				51				731				(126	)
Total noninterest income			11,875				5,919				21,684				10,921
NONINTEREST EXPENSES
Salaries			16,299				12,560				30,249				24,035
Employee benefits expense			3,769				2,578				7,490				5,284
Total personnel expense			20,068				15,138				37,739				29,319
Net occupancy expense			2,358				1,843				4,542				3,786
Equipment related expenses			1,363				919				2,421				1,789
Merger and acquisition expenses			1,122				485				3,495				686
Intangibles amortization expense			1,031				261				1,607				447
Other operating expenses			9,142				7,501				17,352				14,893
Total noninterest expenses			35,084				26,147				67,156				50,920
Income before income taxes			16,707				11,591				28,017				21,757
Income tax expense			5,553				3,952				9,308				7,281
Net income			11,154				7,639				18,709				14,476
Preferred stock dividends			—				(59	)			—				(117	)
Net income available to common shareholders		$	11,154				7,580				18,709				14,359
Earnings per common share:
Basic		$	0.45				0.38				0.80				0.72
Diluted			0.45				0.37				0.80				0.70
Dividends declared per common share		$	0.08				0.08				0.16				0.16
Weighted average common shares outstanding:
Basic			24,593,307				19,921,413				23,288,635				19,852,580
Diluted			24,671,550				20,693,644				23,368,503				20,627,012

 

See accompanying notes to consolidated financial statements.

First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

 

		Three Months Ended June 30,								Six Months Ended June 30,
($ in thousands-unaudited)		2017				2016				2017				2016
Net income		$	11,154				7,639				18,709				14,476
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period, pretax			1,989				2,071				3,102				2,888
Tax (expense) benefit			(737	)			(807	)			(1,144	)			(1,126	)
Reclassification to realized (gains) losses			—				—				235				(3	)
Tax expense (benefit)			—				—				(87	)			1
Postretirement Plans:
Amortization of unrecognized net actuarial (gain) loss			54				51				105				102
Tax expense (benefit)			(16	)			(20	)			(36	)			(40	)
Other comprehensive income (loss)			1,290				1,295				2,175				1,822
Comprehensive income		$	12,444				8,934				20,884				16,298

 

See accompanying notes to consolidated financial statements.

 

First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

 

(In thousands, except per share - unaudited)		Preferred				Common Stock								Retained				Stock in Directors’ Rabbi				Directors’ Deferred Fees				Accumulated Other Compre- hensive Income				Total Share- holders’
		Stock				Shares				Amount				Earnings				Trust				Obligation				(Loss)				Equity
Balances, January 1, 2016		$	7,287				19,748			$	133,393				205,060				—				—				(3,550	)			342,190
Net income															14,476																14,476
Cash dividends declared ($0.16 per common share)															(3,196	)															(3,196	)
Preferred dividends															(117	)															(117	)
Equity issued pursuant to acquisition							279				5,509																				5,509
Stock option exercises							23				375																				375
Stock-based compensation							38				555																				555
Other comprehensive income (loss)																											1,822				1,822
Balances, June 30, 2016		$	7,287				20,088			$	139,832				216,223				—				—				(1,728	)			361,614
Balances, January 1, 2017		$	—				20,845			$	147,287				225,921				—				—				(5,107	)			368,101
Net income															18,709																18,709
Cash dividends declared ($0.16 per common share)															(3,948	)															(3,948	)
Equity issued pursuant to acquisition							3,799				114,478								(7,688	)			7,688								114,478
Payment of deferred fees																			3,431				(3,431	)							—
Stock option exercises							16				287																				287
Stock-based compensation							18				849																				849
Other comprehensive income (loss)																											2,175				2,175
Balances, June 30, 2017		$	—				24,678			$	262,901				240,682				(4,257	)			4,257				(2,932	)			500,651

First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

 

		Six Months Ended June 30,
($ in thousands-unaudited)		2017				2016
Cash Flows From Operating Activities
Net income		$	18,709				14,476
Reconciliation of net income to net cash provided by operating activities:
Provision (reversal) for loan losses			723				(23	)
Net security premium amortization			1,470				1,523
Loan discount accretion			(3,328	)			(2,731	)
Purchase accounting accretion and amortization, net			(122	)			4,020
Foreclosed property losses and write-downs (gains), net			223				(77	)
Loss (gain) on securities available for sale			235				(3	)
Other losses (gains)			(731	)			126
Decrease (increase) in net deferred loan costs			759				(201	)
Depreciation of premises and equipment			2,708				2,244
Stock-based compensation expense			683				380
Amortization of intangible assets			1,607				447
Fees/gains from sale of presold mortgage and SBA loans			(3,828	)			(781	)
Origination of presold mortgages in process of settlement and SBA loans			(136,886	)			(32,046	)
Proceeds from sales of presold mortgages in process of settlement and SBA loans			130,246				33,081
Decrease (increase) in accrued interest receivable			(27	)			14
Decrease in other assets			2,810				11,116
Increase in accrued interest payable			211				1
Decrease in other liabilities			(11,886	)			(651	)
Net cash provided by operating activities			3,576				30,915
Cash Flows From Investing Activities
Purchases of securities available for sale			(29,809	)			(99,896	)
Purchases of securities held to maturity			(291	)			—
Proceeds from maturities/issuer calls of securities available for sale			15,497				47,846
Proceeds from maturities/issuer calls of securities held to maturity			13,683				11,796
Proceeds from sales of securities available for sale			45,601				8
Purchases of Federal Reserve and Federal Home Loan Bank stock, net			(6,527	)			(988	)
Net increase in loans			(162,197	)			(82,723	)
Payments related to FDIC loss share agreements			—				(738	)
Proceeds from sales of foreclosed real estate			4,610				3,375
Purchases of premises and equipment			(2,135	)			(3,695	)
Proceeds from sales of premises and equipment			—				21
Net cash received (paid) in acquisition			56,185				(2,519	)
Net cash used by investing activities			(65,383	)			(127,513	)
Cash Flows From Financing Activities
Net increase in deposits			111,756				60,735
Net increase in borrowings			64,973				20,000
Cash dividends paid – common stock			(3,642	)			(3,160	)
Cash dividends paid – preferred stock			—				(117	)
Proceeds from stock option exercises			287				375
Net cash provided by financing activities			173,374				77,833
Increase (decrease) in cash and cash equivalents			111,567				(18,765	)
Cash and cash equivalents, beginning of period			305,993				267,268
Cash and cash equivalents, end of period		$	417,560				248,503
Supplemental Disclosures of Cash Flow Information:
Cash paid (received) during the period for:
Interest		$	4,872				3,708
Income taxes			8,570				(933	)
Non-cash transactions:
Unrealized gain (loss) on securities available for sale, net of taxes			2,106				1,760
Foreclosed loans transferred to other real estate			3,415				3,910

 

See accompanying notes to consolidated financial statements.

 

 

First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

 

 

(unaudited)

For the Periods Ended June 30, 2017 and 2016

 

Note 1 - Basis of Presentation

 

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company as of June 30, 2017 and 2016 and the consolidated results of operations and consolidated cash flows for the periods ended June 30, 2017 and 2016. All such adjustments were of a normal, recurring nature. Reference is made to the 2016 Annual Report on Form 10-K filed with the SEC for a discussion of accounting policies and other relevant information with respect to the financial statements. The results of operations for the periods ended June 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated all subsequent events through the date the financial statements were issued.

 

Note 2 – Accounting Policies

 

Note 1 to the 2016 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 31, 2017. The Company can apply the guidance using a full retrospective approach or a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

 

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This update is intended to improve the recognition and measurement of financial instruments and it requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The guidance also provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes and requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

 

In February 2016, the FASB issued new guidance on accounting for leases, which generally requires all leases to be recognized in the statement of financial position by recording an asset representing its right to use the underlying asset and recording a liability, which represents the Company’s obligation to make lease payments. The provisions of this guidance are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. These provisions are to be applied using a modified retrospective approach. The Company is evaluating the effect that this new guidance will have on our consolidated financial statements, but does not expect it will have a material effect on its financial statements.

 

In March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective to each period presented. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2016, the FASB amended the Investments—Equity Method and Joint Ventures topic of the Accounting Standards Codification to eliminate the requirement to retroactively adopt the equity method of accounting and instead apply the equity method of accounting starting with the date it qualifies for that method. The amendments were effective for the Company on January 1, 2017. The Company will apply the guidance prospectively to any increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The Company’s adoption of this amendment did not have a material effect on its financial statements.

 

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments were effective for the Company on January 1, 2017 and the adoption of this amendment did not have a material effect on its financial statements.

 

In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the guidance related to identifying performance obligations and accounting for licenses of intellectual property. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

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 loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset.  The CECL model is expected to result in earlier recognition of credit losses.  The guidance also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities.  The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

 

In August 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company does not expect these amendments to have a material effect on its financial statements.

 

In October 2016, the FASB amended the Consolidation topic of the Accounting Standards Codification to revise the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The amendments were effective for the Company on January 1, 2017 and the Company’s adoption of this amendment did not have a material effect on its financial statements.

 

In November 2016, the FASB amended the Statement of Cash Flows topic of the Accounting Standards Codification to clarify how restricted cash is presented and classified in the statement of cash flows. The amendments will be effective for the Company for fiscal years beginning after December 15, 2017 including interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In January 2017, the FASB issued guidance to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments—Equity Method and Joint Ventures Topics of the Accounting Standards Codification. The Accounting Standards Update incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Company is currently evaluating the impact on additional disclosure requirements as each of the standards is adopted, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

 

In January 2017, the FASB issued amended the Goodwill and Other 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. The amount of goodwill impairment will now be 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 will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In February 2017, the FASB amended the Other Income Topic of the Accounting Standards Codification to clarify the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2017, the FASB amended the requirements in the Compensation—Retirement Benefits Topic of the Accounting Standards Codification related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2017, the FASB amended the requirements in the Receivables—Nonrefundable Fees and Other Costs Topic of the Accounting Standards Codification related to the amortization period for certain purchased callable debt securities held at a premium. The amendments shorten the amortization period for the premium to the earliest call date. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. 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 3 – Reclassifications

 

Certain amounts reported in the period ended June 30, 2016 have been reclassified to conform to the presentation for June 30, 2017. These reclassifications had no effect on net income or shareholders’ equity for the periods presented, nor did they materially impact trends in financial information.

 

Note 4 – Acquisitions

 

Since January 1, 2016, the Company completed the acquisitions described below. The results of each acquired company/branch are included in the Company’s results beginning on its respective acquisition date.

 

(1)

On January 1, 2016, First Bank Insurance completed the acquisition of Bankingport, Inc. (“Bankingport”). The results of Bankingport are included in First Bancorp’s results beginning on the January 1, 2016 acquisition date.

 

Bankingport was an insurance agency based in Sanford, North Carolina. This acquisition represented an opportunity to expand the insurance agency operations into a contiguous and significant banking market for the Company. Also, this acquisition provided the Company with a larger platform for leveraging insurance services throughout the Company’s bank branch network. The deal value was $2.2 million and the transaction was completed on January 1, 2016 with the Company paying $0.7 million in cash and issuing 79,012 shares of its common stock, which had a value of approximately $1.5 million. In connection with the acquisition, the Company also paid $1.1 million to purchase the office space previously leased by Bankingport.

 

This acquisition has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Bankingport were recorded based on estimates of fair values as of January 1, 2016. In connection with this transaction, the Company recorded $1.7 million in goodwill, which is non-deductible for tax purposes, and $0.7 million in other amortizable intangible assets.

 

(2)

On May 5, 2016, the Company completed the acquisition of SBA Complete, Inc. (“SBA Complete”). The results of SBA Complete are included in First Bancorp’s results beginning on the May 5, 2016 acquisition date. SBA Complete is a consulting firm that specializes in consulting with financial institutions across the country related to Small Business Administration (“SBA”) loan origination and servicing. The deal value was approximately $8.5 million with the Company paying $1.5 million in cash and issuing 199,829 shares of its common stock, which had a value of approximately $4.0 million. Per the terms of the agreement, the Company recorded an earn-out liability initially valued at $3.0 million, which will be paid in shares of Company stock in annual distributions over a three-year period if pre-determined goals are met for those three years.

 

This acquisition has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of SBA Complete were recorded based on estimates of 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 originally recorded $5.6 million in goodwill, which was non-deductible for tax purposes, and $2.0 million in other amortizable intangible assets.

 

 

In the second quarter of 2017, the Company recorded a measurement period adjustment to reduce the earn-out liability and goodwill by $1.2 million.

 

(3)

On July 15, 2016, the Company completed a branch exchange with First Community Bank headquartered in Bluefield, Virginia. In the branch exchange transaction, First Bank acquired six of First Community Bank’s branches located in North Carolina, while concurrently selling seven of its branches in the southwestern area of Virginia to First Community Bank.

 

In connection with the sale, the Company sold $150.6 million in loans, $5.7 million in premises and equipment and $134.3 million in deposits to First Community Bank. In connection with the sale, the Company received a deposit premium of $3.8 million, removed $1.0 million of allowance for loan losses associated with the sold loans, allocated and wrote-off $3.5 million of previously recorded goodwill, and recorded a net gain of $1.5 million in this transaction.

 

In connection with the purchase transaction, the Company acquired assets with a fair value of $157.2 million, including $152.2 million in loans and $3.4 million in premises and equipment. Additionally, the Company assumed $111.3 million in deposits and $0.2 million in other liabilities. In connection with the purchase, the Company recorded: i) a discount on acquired loans of $1.5 million, ii) a premium on deposits of $0.3 million, iii) a $1.2 million core deposit intangible, and iv) $5.4 million in goodwill.

 

The branch acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of the acquired branches were recorded on the Company’s balance sheet at their fair values as of July 15, 2016 and are subject to change for twelve months following the acquisition. The related results of operations for the acquired branches have been included in the Company’s consolidated statement of income since that date. The goodwill recorded in the branch exchange is deductible for tax purposes.

 

(4)

On March 3, 2017, the Company completed the acquisition of Carolina Bank Holdings, Inc. (“Carolina Bank”), headquartered in Greensboro, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization dated June 21, 2016. The results of Carolina Bank are included in First Bancorp’s results for the period ended June 30, 2017 beginning on the March 3, 2017 acquisition date.

 

Carolina Bank Holdings, Inc. was the parent company of Carolina Bank, a North Carolina state-charted bank with eight bank branches located in the North Carolina cities of Greensboro, High Point, Burlington, Winston-Salem, and Asheboro, and mortgage offices in Burlington, Hillsborough, and Sanford. The acquisition complements the Company’s recent expansion into several of these high-growth markets and increases its market share in others with facilities, operations and experienced staff already in place. The Company was willing to record goodwill primarily due to the reasons just noted, as well as the positive earnings of Carolina Bank. The total merger consideration consisted of $25.3 million in cash and 3,799,471 million shares of the Company’s common stock, with each share of Carolina Bank common stock being exchanged for either $20.00 in cash or 1.002 shares of the Company’s stock, subject to the total consideration being 75% stock / 25% cash. The issuance of common stock was valued at $114,478,000 and was based on the Company’s closing stock price on March 3, 2017 of $30.13 per share.

 

This acquisition has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Carolina Bank were recorded based on estimates of fair values as of March 3, 2017. The Company may change its valuations of acquired Carolina Bank assets and liabilities for up to one year after the acquisition date. The table below is a condensed balance sheet disclosing the amount assigned to each major asset and liability category of Carolina Bank on March 3, 2017, and the related fair value adjustments recorded by the Company to reflect the acquisition. The $65.3 million in goodwill that resulted from this transaction is non-deductible for tax purposes.

($ in thousands)		As Recorded by Carolina Bank				Initial Fair Value Adjustments					Measurement Period Adjustments					As Recorded by First Bancorp
Assets
Cash and cash equivalents		$	81,466				(2	)	(a)			—					81,464
Securities			49,629				(261	)	(b)			—					49,368
Loans, gross			505,560				(5,469	)	(c)			146		(l)			497,522
							(2,715	)	(d)			—
Allowance for loan losses			(5,746	)			5,746		(e)			—					—
Premises and equipment			17,967				4,251		(f)			—					22,218
Core deposit intangible			—				8,790		(g)			—					8,790
Other			34,976				(4,804	)	(h)			2,382		(m)			32,554
Total			683,852				5,536					2,528					691,916
Liabilities
Deposits		$	584,950				431		(i)			—					585,381
Borrowings			21,855				(2,855	)	(j)			—					19,000
Other			12,855				225		(k)			—					13,080
Total			619,660				(2,199	)				—					617,461
Net identifiable assets acquired																	74,455
Total cost of acquisition
Value of stock issued						$	114,478
Cash paid in the acquisition							25,279
Total cost of acquisition																	139,757
Goodwill recorded related to acquisition of Carolina Bank																$	65,302

 

 

Explanation of Fair Value Adjustments

(a)

This adjustment was recorded to a short-term investment to its estimated fair value.

(b)

This fair value adjustment was recorded to adjust the securities portfolio to its estimated fair value.

(c)

This fair value adjustment represents the amount necessary to reduce performing loans to their fair value due to interest rate factors and credit factors. Assuming the loans continue to perform, this amount will be amortized to increase interest income over the remaining lives of the related loans.

(d)

This fair value adjustment was recorded to write-down purchased credit impaired loans assumed in the acquisition to their estimated fair market value.

(e)

This fair value adjustment reduced the allowance for loan losses to zero as required by relevant accounting guidance.

(f)

This adjustment represents the amount necessary to increase premises and equipment from its book value on the date of acquisition to its estimated fair market value.

(g)

This fair value adjustment represents the value of the core deposit base assumed in the acquisition based on a study performed by an independent consulting firm. This amount was recorded by the Company as an identifiable intangible asset and will be amortized as expense on an accelerated basis over seven years.

(h)

This fair value adjustment primarily represents the net deferred tax liability associated with the other fair value adjustments made to record the transaction.

(i)

This fair value adjustment was recorded because the weighted average interest rate of Carolina Bank’s time deposits exceeded the cost of similar wholesale funding at the time of the acquisition. This amount will be amortized to reduce interest expense on an accelerated basis over their remaining five year life.

(j)

This fair value adjustment was primarily recorded because the interest rate of Carolina Bank’s trust preferred security was less than the current interest rate on similar instruments. This amount will be amortized on approximately a straight-line basis to increase interest expense over the remaining life of the related borrowing, which is 18 years.

(k)

This fair value adjustment represents miscellaneous adjustments needed to record assets and liabilities at their fair value.

(l)

This fair value adjustment was a miscellaneous adjustment to increase the initial fair value of gross loans.

(m)

This fair value adjustment relates to changes in the estimate of deferred tax assets/liabilities associated with the acquisition.

 

The following unaudited pro forma financial information presents the combined results of the Company and Carolina Bank as if the acquisition had occurred as of January 1, 2016, after giving effect to certain adjustments, including amortization of the core deposit intangible, and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Carolina Bank constituted a single entity during such period.

 

($ in thousands, except share data)		Carolina Bank earnings - March 3, 2017 to June 30, 2017 - included in Company’s earnings for the six months ended June 30, 2017				Pro Forma Combined Six Months Ended June 30, 2017				Pro Forma Combined Six Months Ended June 30, 2016
Net interest income		$	8,778				78,260				73,533
Noninterest income			1,871				22,874				16,479
Total revenue			10,649				101,134				90,012
Net income available to common shareholders			2,275				21,229				11,264
Earnings per common share
Basic						$	0.86				0.48
Diluted							0.86				0.46

 

For purposes of the supplemental pro forma information, merger-related expenses of $3.2 million that are reflected in the Company’s consolidated statements of income for the six months ended June 30, 2017 and $4.6 million of merger-related expenses that were recorded by Carolina Bank in 2017 prior to the merger date were reflected in the pro forma presentation for 2016.

 

Note 5 – Equity-Based Compensation Plans

 

The Company recorded total stock-based compensation expense of $479,000 and $258,000 for the three months ended June 30, 2017 and 2016, respectively, and $657,000 and $380,000 for the six months ended June 30, 2017 and 2016, respectively. Of the $657,000 in expense that was recorded in 2017, approximately $320,000 related to the June 1, 2017 director grants, which is classified as “other operating expenses” in the Consolidated Statements of Income. The remaining $337,000 in expense relates to the employee grants discussed below and is recorded as “salaries expense.” Stock based compensation is reflected as an adjustment to cash flows from operating activities on the Company’s Consolidated Statement of Cash Flows. The Company recognized $243,000 and $148,000 of income tax benefits related to stock based compensation expense in the income statement for the six months ended June 30, 2017 and 2016, respectively.

 

At June 30, 2017, the Company had the following equity-based compensation plans: the First Bancorp 2014 Equity Plan and the First Bancorp 2007 Equity Plan. The Company’s shareholders approved all equity-based compensation plans. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of June 30, 2017, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were 836,206 shares remaining available for grant.

 

The First Bancorp 2014 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 First Bancorp 2014 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 grants to employees have either had performance vesting conditions, service vesting conditions, or both. Compensation expense for these grants is recorded over the various service periods based on the estimated number of equity grants that are probable to vest. No compensation cost is recognized for grants that do not vest and any previously recognized compensation cost will be reversed. The Company issues new shares of common stock when options are exercised.

 

Certain of the Company’s stock option 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 options and awards that will ultimately vest. Over the past five years, there have only been minimal amounts of forfeitures, and therefore the Company assumes that all awards granted without performance conditions will become vested.

 

The Company typically grants shares of common stock to each non-employee director in June of each year. On June 1, 2017, the Company granted 11,190 shares of common stock to non-employee directors (1,119 shares per director), at a fair market value of $28.59 per share, which was the closing price of the Company’s common stock on that date, which resulted in $320,000 in expense. On June 1, 2016, the Company granted 6,584 shares of common stock to non-employee directors (823 shares per director), at a fair market value of $19.56 per share, which was the closing price of the Company’s common stock on that date, which resulted in $129,000 in expense.

 

The Company’s senior officers receive their annual bonus earned under the Company’s annual incentive plan in a mix of 50% cash and 50% stock, with the stock being subject to a three year vesting term. In the last three years, a total of 55,648 shares of restricted stock have been granted related to performance in the preceding fiscal years. Total compensation expense associated with those grants was $758,000 and is being recognized over the respective vesting periods. The Company recorded $66,000 and $55,000 in compensation expense during the three months ended June 30, 2017 and 2016, respectively, and $151,000 and $111,000 for the six months ended June 30, 2017 and 2016, respectively, related to these grants and expects to record $66,000 in compensation expense during each remaining quarter of 2017.

 

In the last three years, the Compensation Committee also granted 97,799 shares of stock to various employees of the Company to promote retention. The total value associated with these grants amounted to $1.8 million, which is being recorded as an expense over their three year vesting periods. For the three months ended June 30, 2017 and 2016, total compensation expense related to these grants was $89,000 and $69,000, respectively, and for the six months ended June 30, 2017 and 2016, total compensation expense was $186,000 and $139,000, respectively. The Company expects to record $82,000 in compensation expense during each remaining quarter of 2017. All grants were issued based on the closing price of the Company’s common stock on the date of the grant.

 

The following table presents information regarding the activity for the first six months of 2017 related to the Company’s outstanding restricted stock:

 

		Long-Term Restricted Stock
		Number of Units				Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2017			91,790			$	18.65
Granted during the period			16,062				29.99
Vested during the period			(2,282	)			18.27
Forfeited or expired during the period			(8,535	)			18.34
Nonvested at June 30, 2017			97,035			$	20.56

 

In years prior to 2009, stock options were a primary form of equity grant utilized by the Company. The stock options had a term of ten years. In a change in control (as defined in the plans), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.

 

At June 30, 2017, there were 40,689 stock options outstanding related to the two First Bancorp plans, with exercise prices ranging from $14.35 to $16.81.

 

The following table presents information regarding the activity for the first six months of 2017 related to 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, 2017			59,948			$	17.18
Granted			—				—
Exercised			(19,259	)			19.44							$	193,844
Forfeited			—				—
Expired			—				—
Outstanding at June 30, 2017			40,689			$	16.11				1.2			$	618,483
Exercisable at June 30, 2017			40,689			$	16.11				1.2			$	618,483

 

 

During the three and six months ended June 30, 2017, the Company received $242,000 and $287,000, respectively, as a result of stock option exercises. During the three and six months ended June 30, 2016, the Company received $248,000 and $375,000, respectively, as a result of stock option exercises.

 

Note 6 – Earnings Per Common Share

 

Basic Earnings Per Common Share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding 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 and the Company’s Series C Preferred stock, which was exchanged for common stock at a one-for-one ratio on December 22, 2016 - see Note 19 of the Company’s 2016 Annual Report on Form 10-K for additional detail.

 

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 number of unvested shares less the assumed number of shares bought back by the Company in the open market at the average market price with the amount of proceeds being equal to the average deferred compensation for the reporting period. 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 the preferred stock that was outstanding during the periods in 2016, dividends on the preferred stock were added back to net income and the preferred shares assumed to be converted were included in the number of shares outstanding.

 

If any of the potentially dilutive common stock issuances have an anti-dilutive effect, the potentially dilutive common stock issuance is disregarded.

 

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Earnings Per Common Share:

 

		For the Three Months Ended June 30,
		2017												2016
($ in thousands except per share amounts)		Income (Numer- ator)				Shares (Denom- inator)				Per Share Amount				Income (Numer- ator)				Shares (Denom- inator)				Per Share Amount
Basic EPS
Net income available to common shareholders		$	11,154				24,593,307			$	0.45			$	7,580				19,921,413			$	0.38
Effect of Dilutive Securities			—				78,243								59				772,231
Diluted EPS per common share		$	11,154				24,671,550			$	0.45			$	7,639				20,693,644			$	0.37

 

 

		For the Six Months Ended June 30,
		2017												2016
($ in thousands except per share amounts)		Income (Numer- ator)				Shares (Denom- inator)				Per Share Amount				Income (Numer- ator)				Shares (Denom- inator)				Per Share Amount
Basic EPS
Net income available to common shareholders		$	18,709				23,288,635			$	0.80			$	14,359				19,852,580			$	0.72
Effect of Dilutive Securities			—				79,868								117				774,432
Diluted EPS per common share		$	18,709				23,368,503			$	0.80			$	14,476				20,627,012			$	0.70

 

For both the three and six months ended June 30, 2017, there were no options that were antidilutive. For both the three and six months ended June 30, 2016, there were 16,250 options that were antidilutive because the exercise price exceeded the average market price for the period, and thus are not included in the calculation to determine the effect of dilutive securities.

 

Note 7 – Securities

 

The book values and approximate fair values of investment securities at June 30, 2017 and December 31, 2016 are summarized as follows:

 

		June 30, 2017																December 31, 2016
		Amortized				Fair				Unrealized								Amortized				Fair				Unrealized
($ in thousands)		Cost				Value				Gains				(Losses)				Cost				Value				Gains				(Losses)
Securities available for sale:
Government-sponsored enterprise securities		$	16,498				16,498				7				(7	)			17,497				17,490				—				(7	)
Mortgage-backed securities			156,934				156,601				647				(980	)			151,001				148,065				155				(3,091	)
Corporate bonds			33,812				34,397				650				(65	)			33,833				33,600				91				(324	)
Equity securities			—				—				—				—				83				174				96				(5	)
Total available for sale		$	207,244				207,496				1,304				(1,052	)			202,414				199,329				342				(3,427	)
Securities held to maturity:
Mortgage-backed securities		$	72,257				72,005				10				(262	)			80,585				79,283				—				(1,302	)
State and local governments			55,609				57,692				2,090				(7	)			49,128				50,912				1,815				(31	)
Total held to maturity		$	127,866				129,697				2,100				(269	)			129,713				130,195				1,815				(1,333	)

 

All of the Company’s mortgage-backed securities were issued by government-sponsored corporations.

 

 

The following table presents information regarding securities with unrealized losses at June 30, 2017:

 

($ 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		$	7,991				7				—				—				7,991				7
Mortgage-backed securities			131,117				865				16,909				377				148,026				1,242
Corporate bonds			—				—				935				65				935				65
State and local governments			817				7				—				—				817				7
Total temporarily impaired securities		$	139,925				879				17,844				442				157,769				1,321

 

The following table presents information regarding securities with unrealized losses at December 31, 2016:

 

($ 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		$	7,990				7				—				—				7,990				7
Mortgage-backed securities			196,999				3,841				19,001				552				216,000				4,393
Corporate bonds			27,027				259				935				65				27,962				324
Equity securities			—				—				7				5				7				5
State and local governments			801				31				—				—				801				31
Total temporarily impaired securities		$	232,817				4,138				19,943				622				252,760				4,760

 

In the above tables, all of the non-equity securities that were in an unrealized loss position at June 30, 2017 and December 31, 2016 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 has evaluated the collectability of each of these bonds and has concluded that there is 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.

 

The Company has also concluded that each of the equity securities in an unrealized loss position at December 31, 2016 was in such a position due to temporary fluctuations in the market prices of the securities. The Company’s policy is to record an impairment charge for any of these equity securities that remains in an unrealized loss position for twelve consecutive months unless the amount is insignificant.

 

The book values and approximate fair values of investment securities at June 30, 2017, 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
		Amortized				Fair				Amortized				Fair
($ in thousands)		Cost				Value				Cost				Value
Debt securities
Due within one year		$	—				—				1,873				1,888
Due after one year but within five years			16,498				16,498				23,718				24,580
Due after five years but within ten years			28,812				29,287				24,251				25,405
Due after ten years			5,000				5,110				5,767				5,819
Mortgage-backed securities			156,934				156,601				72,257				72,005
Total securities		$	207,244				207,496				127,866				129,697

 

At June 30, 2017 and December 31, 2016 investment securities with carrying values of $183,529,000 and $147,009,000, respectively, were pledged as collateral for public deposits.

 

In the first six months of 2017, the Company received proceeds from sales of securities of $45,601,000 and recorded losses of $235,000 from the sales. In the first half of 2016, the Company received proceeds from sales of securities of $8,000 and recorded $3,000 in gains from the sales.

 

Included in “other assets” in the Consolidated Balance Sheets are cost method investments in Federal Home Loan Bank (“FHLB”) stock and Federal Reserve Bank of Richmond (“FRB”) stock totaling $26,353,000 and $19,826,000 at June 30, 2017 and December 31, 2016, respectively. The FHLB stock had a cost and fair value of $16,702,000 and $12,588,000 at June 30, 2017 and December 31, 2016, 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 $9,651,000 and $7,238,000 at June 30, 2017 and December 31, 2016, respectively. 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.

 

Note 8 – Loans and Asset Quality Information

 

Prior to September 22, 2016, the Company’s banking subsidiary, First Bank, had certain loans and foreclosed real estate that were covered by loss share agreements between the FDIC and First Bank which afforded First Bank significant loss protection - see Note 2 to the financial statements included in the Company’s 2011 Annual Report on Form 10-K for detailed information regarding FDIC-assisted purchase transactions. On September 22, 2016, the Company terminated all of the loss share agreements with the FDIC, such that all future losses and recoveries on loans and foreclosed real estate associated with the failed banks acquired through FDIC-assisted transactions will be borne solely by First Bank.

 

In the information presented below, the term “covered” is used to describe assets that were subject to FDIC loss share agreements, while the term “non-covered” refers to the Company’s legacy assets, which were not included in any type of loss share arrangement. As discussed previously, all loss share agreements were terminated during 2016 and thus the entire loan portfolio is now classified as non-covered. Certain prior period disclosures will continue to present the breakout of the loan portfolio between covered and non-covered.

 

On March 3, 2017, the Company acquired Carolina Bank (see Note 4 for more information). As a result of this acquisition, the Company recorded loans with a fair value of $497.5 million. Of those loans, $19.3 million were considered to be 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 are considered to be purchased non-impaired loans and their related fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan.

 

The following table relates to Carolina Bank PCI loans and summarizes the contractually required payments, which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at the acquisition date.

 

($ in thousands)		Carolina Bank Acquisition on March 3, 2017
Contractually required payments		$	27,108
Nonaccretable difference			(4,237	)
Cash flows expected to be collected at acquisition			22,871
Accretable yield			(3,617	)
Fair value of PCI loans at acquisition date		$	19,254

 

The following table relates to acquired Carolina Bank purchased non-impaired loans and provides the contractually required payments, fair value, and estimate of contractual cash flows not expected to be collected at the acquisition date.

 

($ in thousands)		Carolina Bank Acquisition on March 3, 2017
Contractually required payments		$	569,980
Fair value of acquired loans at acquisition date			478,515
Contractual cash flows not expected to be collected			3,650

 

The following is a summary of the major categories of total loans outstanding:

 

($ in thousands)		June 30, 2017								December 31, 2016								June 30, 2016
		Amount				Percentage				Amount				Percentage				Amount				Percentage
All  loans (non-covered and covered):
Commercial, financial, and agricultural		$	383,834				11	%		$	261,813				9	%		$	244,862				9	%
Real estate – construction, land development & other land loans			446,661				13	%			354,667				13	%			310,993				12	%
Real estate – mortgage – residential (1-4 family) first mortgages			783,759				23	%			750,679				28	%			751,446				29	%
Real estate – mortgage – home equity loans / lines of credit			320,953				10	%			239,105				9	%			238,794				9	%
Real estate – mortgage – commercial and other			1,384,569				41	%			1,049,460				39	%			1,000,578				39	%
Installment loans to individuals			57,008				2	%			55,037				2	%			50,387				2	%
Subtotal			3,376,784				100	%			2,710,761				100	%			2,597,060				100	%
Unamortized net deferred loan costs (fees)			(808	)							(49	)							1,074
Total loans		$	3,375,976							$	2,710,712							$	2,598,134

 

The following is a summary of the major categories of loans outstanding allocated to the non-covered and covered loan portfolios for periods when the FDIC loss share agreements were in effect at June 30, 2016. There were no covered loans at June 30, 2017 or December 31, 2016.

 

($ in thousands)		June 30, 2016
		Non-covered				Covered				Total
Commercial, financial, and agricultural		$	244,862				—			$	244,862
Real estate – construction, land development & other land loans			310,832				161				310,993
Real estate – mortgage – residential (1-4 family) first mortgages			683,367				68,079				751,446
Real estate – mortgage – home equity loans / lines of credit			228,906				9,888				238,794
Real estate – mortgage – commercial and other			1,000,319				259				1,000,578
Installment loans to individuals			50,387				—				50,387
Subtotal			2,518,673				78,387				2,597,060
Unamortized net deferred loan costs			1,074				—				1,074
Total		$	2,519,747				78,387			$	2,598,134

 

 

The following presents the carrying amount of the covered loans at June 30, 2016 detailed by purchased credit impaired and purchased non-impaired loans (as determined on the date of the acquisition). There were no covered loans at June 30, 2017 or December 31, 2016.

 

($ in thousands)		Impaired Purchased Loans – Carrying Value				Impaired Purchased Loans – Unpaid Principal Balance				Nonimpaired Purchased Loans – Carrying Value				Nonimpaired Purchased Loans - Unpaid Principal Balance				Total Covered Loans – Carrying Value				Total Covered Loans – Unpaid Principal Balance
Covered loans:
Commercial, financial, and agricultural		$	—				—				—				—				—				—
Real estate – construction, land development & other land loans			—				—				161				162				161				162
Real estate – mortgage – residential (1-4 family) first mortgages			—				33				68,079				78,940				68,079				78,973
Real estate – mortgage – home equity loans / lines of credit			6				14				9,882				11,140				9,888				11,154
Real estate – mortgage – commercial and other			—				—				259				294				259				294
Installment loans to individuals			—				—				—				—				—				—
Total		$	6				47				78,381				90,536				78,387				90,583

The following table presents information regarding covered purchased non-impaired loans since January 1, 2016. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond. All balances of covered loans were transferred to non-covered as of the termination of the loss share agreements.

 

($ in thousands)
Carrying amount of nonimpaired covered loans at January 1, 2016		$	101,252
Principal repayments			(7,997	)
Transfers to foreclosed real estate			(1,036	)
Net loan recoveries			1,784
Accretion of loan discount			1,908
Transfer to non-covered loans due to expiration of loss-share agreement, April 1, 2016			(17,530	)
Transfer to non-covered loans due to termination of loss-share agreements, September 22, 2016			(78,381	)
Carrying amount of nonimpaired covered loans at December 31, 2016		$	—

 

The following table presents information regarding all PCI loans since January 1, 2016.

($ in thousands)   Purchased Credit Impaired Loans		Accretable Yield				Carrying Amount
Balance at January 1, 2016		$	—				1,970
Change due to payments received			—				(1,386	)
Change due to loan charge-off			—				(70	)
Balance at December 31, 2016		$	—				514
Additions due to acquisition of Carolina Bank			3,617				19,254
Accretion			(871	)			871
Change due to payments received			—				(3,317	)
Transfer to foreclosed real estate			—				(69	)
Other			—				(407	)
Balance at June 30, 2017		$	2,746				16,846

 

During the first six months of 2017, the Company received $564,000 in payments that exceeded the carrying amount of the related purchased credit impaired loans, of which $558,000 was recognized as loan discount accretion income and $6,000 was recorded as additional loan interest income. During the first six months of 2016, the Company received $1,108,000 in payments that exceeded the carrying amount of the related purchased credit impaired loans, of which $780,000 was recognized as loan discount accretion income, $295,000 was recorded as additional loan interest income, and $33,000 was recorded as a recovery.

 

Nonperforming assets are defined as nonaccrual loans, restructured loans, loans past due 90 or more days and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are summarized as follows:

 

ASSET QUALITY DATA ($ in thousands)		June 30, 2017				December 31, 2016				June 30, 2016
Nonperforming assets
Nonaccrual loans		$	22,795				27,468				37,975
Restructured loans - accruing			21,019				22,138				29,271
Accruing loans > 90 days past due			—				—				—
Total nonperforming loans			43,814				49,606				67,246
Foreclosed real estate			11,196				9,532				10,606
Total nonperforming assets		$	55,010				59,138				77,852
Total covered nonperforming assets included above (1)		$	—				—				8,024
Purchased credit impaired loans not included above (2)		$	16,846				—				—

 

(1) All FDIC loss share agreements were terminated effective September 22, 2016 and, accordingly, assets previously covered under those agreements become non-covered on that date.

(2) In the March 3, 2017 acquisition of Carolina Bank Holdings, Inc., the Company acquired $19.3 million in purchased credit impaired loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.4 million in purchased credit impaired loans at June 30, 2017 that are contractually past due 90 days or more.

 

At June 30, 2017 and December 31, 2016, the Company had $1.1 million and $1.7 million in residential mortgage loans in process of foreclosure, respectively.

 

The following is a summary of the Company’s nonaccrual loans by major categories.

 

($ in thousands)		June 30, 2017				December 31, 2016
Commercial, financial, and agricultural		$	1,027				1,842
Real estate – construction, land development & other land loans			1,007				2,945
Real estate – mortgage – residential (1-4 family) first mortgages			15,262				16,017
Real estate – mortgage – home equity loans / lines of credit			1,942				2,355
Real estate – mortgage – commercial and other			3,451				4,208
Installment loans to individuals			106				101
Total		$	22,795				27,468

 

The following table presents an analysis of the payment status of the Company’s loans as of June 30, 2017.

 

($ 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		$	236				20				—				1,027				382,282				383,565
Real estate – construction, land development & other land loans			1,040				174				—				1,007				443,985				446,206
Real estate – mortgage – residential (1-4 family) first mortgages			2,847				2,784				—				15,262				759,414				780,307
Real estate – mortgage – home equity loans / lines of credit			1,018				54				—				1,942				317,214				320,228
Real estate – mortgage – commercial and other			1,094				72				—				3,451				1,368,065				1,372,682
Installment loans to individuals			115				85				—				106				56,644				56,950
Purchased credit impaired			132				5				430				—				16,279				16,846
Total		$	6,482				3,194				430				22,795				3,343,883				3,376,784
Unamortized net deferred loan fees																							(808	)
Total loans																						$	3,375,976

 

The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2016.

 

($ 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		$	92				—				—				1,842				259,879				261,813
Real estate – construction, land development & other land loans			473				168				—				2,945				351,081				354,667
Real estate – mortgage – residential (1-4 family) first mortgages			4,487				443				—				16,017				729,732				750,679
Real estate – mortgage – home equity loans / lines of credit			1,751				178				—				2,355				234,821				239,105
Real estate – mortgage – commercial and other			1,482				449				—				4,208				1,042,807				1,048,946
Installment loans to individuals			186				193				—				101				54,557				55,037
Purchased credit impaired			—				—				—				—				514				514
Total		$	8,471				1,431				—				27,468				2,673,391				2,710,761
Unamortized net deferred loan fees																							(49	)
Total loans																						$	2,710,712

 

 

The following table presents the activity in the allowance for loan losses for all loans for the three and six months ended June 30, 2017.

 

($ 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				Installment Loans to Individuals				Unallo- cated				Total
As of and for the three months ended June 30, 2017
Beginning balance		$	3,792				2,764				7,376				2,138				5,979				1,067				430				23,546
Charge-offs			(814	)			(92	)			(353	)			(347	)			(88	)			(172	)			—				(1,866	)
Recoveries			220				981				440				65				555				84				—				2,345
Provisions			232				(977	)			(378	)			201				(293	)			95				1,120				—
Ending balance		$	3,430				2,676				7,085				2,057				6,153				1,074				1,550				24,025
As of and for the six months ended June 30, 2017
Beginning balance		$	3,829				2,691				7,704				2,420				5,098				1,145				894				23,781
Charge-offs			(1,204	)			(269	)			(1,247	)			(578	)			(414	)			(359	)			—				(4,071	)
Recoveries			518				1,471				636				130				698				139				—				3,592
Provisions			287				(1,217	)			(8	)			85				771				149				656				723
Ending balance		$	3,430				2,676				7,085				2,057				6,153				1,074				1,550				24,025
Ending balances as of June 30, 2017:  Allowance for loan losses
Individually evaluated for impairment		$	8				182				1,304				—				424				—				—				1,918
Collectively evaluated for impairment		$	3,422				2,494				5,781				2,057				5,729				1,074				1,550				22,107
Purchased credit impaired		$	—				—				—				—				—				—				—				—
Loans receivable as of June 30, 2017:
Ending balance – total		$	383,834				446,661				783,759				320,953				1,384,569				57,008				—				3,376,784
Unamortized net deferred loan fees																															(808	)
Total loans																														$	3,375,976
Ending balances as of June 30, 2017: Loans
Individually evaluated for impairment		$	235				3,250				17,083				54				9,053				—				—				29,675
Collectively evaluated for impairment		$	383,330				442,956				763,224				320,174				1,363,629				56,950				—				3,330,263
Purchased credit impaired		$	269				455				3,452				725				11,887				58				—				16,846

 

 

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2016. There were no covered loans at December 31, 2016 and all reserves associated with previously covered loans have been transferred to the non-covered allowance.

 

($ 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				Installment Loans to Individuals				Unallo- cated				Covered				Total
As of and for the year ended December 31, 2016
Beginning balance		$	4,742				3,754				7,832				2,893				5,816				1,051				696				1,799				28,583
Charge-offs			(2,271	)			(1,101	)			(3,815	)			(969	)			(1,005	)			(1,008	)			(1	)			(244	)			(10,414	)
Recoveries			805				1,422				1,060				250				836				354				—				1,958				6,685
Transfer from covered status			56				65				839				293				127				—				1				(1,381	)			—
Removed due to branch loan sale			(263	)			(39	)			(347	)			(110	)			(228	)			(63	)			—				—				(1,050	)
Provisions			760				(1,410	)			2,135				63				(448	)			811				198				(2,132	)			(23	)
Ending balance		$	3,829				2,691				7,704				2,420				5,098				1,145				894				—				23,781
Ending balances as of December 31, 2016:  Allowance for loan losses
Individually evaluated for impairment		$	7				184				1,339				5				105				—				—				—				1,640
Collectively evaluated for impairment		$	3,822				2,507				6,365				2,415				4,993				1,145				894				—				22,141
Purchased credit impaired		$	—				—				—				—				—				—				—				—				—
Loans receivable as of December 31, 2016:
Ending balance – total		$	261,813				354,667				750,679				239,105				1,049,460				55,037				—				—				2,710,761
Unamortized net deferred loan fees																																			(49	)
Total loans																																		$	2,710,712
Ending balances as of December 31, 2016: Loans
Individually evaluated for impairment		$	644				4,001				20,807				280				6,494				—				—				—				32,226
Collectively evaluated for impairment		$	261,169				350,666				729,872				238,825				1,042,452				55,037				—				—				2,678,021
Purchased credit impaired		$	—				—				—				—				514				—				—				—				514

 

The following table presents the activity in the allowance for loan losses for all loans for the three and six months ended June 30, 2016.

 

($ 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				Installment Loans to Individuals				Unallo -cated				Covered				Total
As of and for the three month ended June 30, 2016
Beginning balance		$	4,679				3,345				7,374				2,267				5,940				1,202				442				1,399				26,648
Charge-offs			(57	)			(137	)			(740	)			(285	)			(396	)			(238	)			—				(4	)			(1,857	)
Recoveries			216				121				61				64				155				140				—				756				1,513
Transfer from covered category			56				62				51				12				126				—				—				(307	)			—
Provisions			(612	)			(492	)			1,114				227				(254	)			376				130				(770	)			(281	)
Ending balance		$	4,282				2,899				7,860				2,285				5,571				1,480				572				1,074				26,023
As of and for the six month ended June 30, 2016
Beginning balance		$	4,742				3,754				7,832				2,893				5,816				1,051				696				1,799				28,583
Charge-offs			(734	)			(477	)			(2,691	)			(734	)			(562	)			(518	)			—				(245	)			(5,961	)
Recoveries			302				211				295				119				285				253				—				1,959				3,424
Transfer from covered category			56				62				51				12				126				—				—				(307	)			—
Provisions			(84	)			(651	)			2,373				(5	)			(94	)			694				(124	)			(2,132	)			(23	)
Ending balance		$	4,282				2,899				7,860				2,285				5,571				1,480				572				1,074				26,023
Ending balances as of June 30, 2016:  Allowance for loan losses
Individually evaluated for impairment		$	14				172				1,263				11				478				70				—				443				2,451
Collectively evaluated for impairment		$	4,268				2,727				6,597				2,274				5,093				1,410				572				631				23,572
Purchased credit impaired		$	—				—				—				—				—				—				—				—				—
Loans receivable as of June 30, 2016:
Ending balance – total		$	244,862				310,832				683,367				228,906				1,000,319				50,387				—				78,387				2,597,060
Unamortized net deferred loan costs																																			1,074
Total loans																																		$	2,598,134
Ending balances as of June 30, 2016: Loans
Individually evaluated for impairment		$	859				4,614				20,201				383				12,845				72				—				5,500				44,474
Collectively evaluated for impairment		$	244,003				306,218				662,959				228,523				986,926				50,315				—				72,881				2,551,825
Purchased credit impaired		$	—				—				207				—				548				—				—				6				761

 

 

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of June 30, 2017.

 

($ in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment
Impaired loans with no related allowance recorded:
Commercial, financial, and agricultural		$	188				426				—				337
Real estate – mortgage – construction, land development & other land loans			2,711				3,881				—				2,883
Real estate – mortgage – residential (1-4 family) first mortgages			6,682				7,424				—				7,890
Real estate – mortgage –home equity loans / lines of credit			54				80				—				76
Real estate – mortgage –commercial and other			2,302				2,528				—				3,496
Installment loans to individuals			—				—				—				1
Total impaired loans with no allowance		$	11,937				14,339				—				14,683
Impaired loans with an allowance recorded:
Commercial, financial, and agricultural		$	47				47				8				124
Real estate – mortgage – construction, land development & other land loans			539				557				182				682
Real estate – mortgage – residential (1-4 family) first mortgages			10,401				10,622				1,304				10,755
Real estate – mortgage –home equity loans / lines of credit			—				—				—				110
Real estate – mortgage –commercial and other			6,751				6,776				424				4,711
Installment loans to individuals			—				—				—				—
Total impaired loans with allowance		$	17,738				18,002				1,918				16,382

 

Interest income on impaired loans recognized during the six months ended June 30, 2017 was insignificant.

 

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2016.

 

($ in thousands)		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment
Impaired loans with no related allowance recorded:
Commercial, financial, and agricultural		$	593				706				—				816
Real estate – mortgage – construction, land development & other land loans			3,221				4,558				—				3,641
Real estate – mortgage – residential (1-4 family) first mortgages			10,035				12,220				—				11,008
Real estate – mortgage –home equity loans / lines of credit			114				146				—				139
Real estate – mortgage –commercial and other			4,598				5,112				—				8,165
Installment loans to individuals			—				2				—				1
Total impaired loans with no allowance		$	18,561				22,744				—				23,770
Impaired loans with an allowance recorded:
Commercial, financial, and agricultural		$	51				51				7				202
Real estate – mortgage – construction, land development & other land loans			780				798				184				844
Real estate – mortgage – residential (1-4 family) first mortgages			10,772				11,007				1,339				13,314
Real estate – mortgage –home equity loans / lines of credit			166				166				5				324
Real estate – mortgage –commercial and other			1,896				1,929				105				4,912
Installment loans to individuals			—				—				—				49
Total impaired loans with allowance		$	13,665				13,951				1,640				19,645

 

Interest income on impaired loans recognized during the year ended December 31, 2016 was insignificant.

 

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 required 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 June 30, 2017.

 

($ in thousands)
		Pass				Special Mention Loans				Classified Accruing Loans				Classified Nonaccrual Loans				Total
Commercial, financial, and agricultural		$	372,670				8,517				1,351				1,027				383,565
Real estate – construction, land development & other land loans			430,501				7,365				7,333				1,007				446,206
Real estate – mortgage – residential (1-4 family) first mortgages			715,645				14,401				34,999				15,262				780,307
Real estate – mortgage – home equity loans / lines of credit			308,378				1,415				8,493				1,942				320,228
Real estate – mortgage – commercial and other			1,333,782				23,728				11,721				3,451				1,372,682
Installment loans to individuals			56,238				227				379				106				56,950
Purchased credit impaired			6,953				5,257				4,636				—				16,846
Total		$	3,224,167				60,910				68,912				22,795				3,376,784
Unamortized net deferred loan fees																			(808	)
Total loans																			3,375,976

 

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2016.

 

($ in thousands)
		Pass				Special Mention Loans				Classified Accruing Loans				Classified Nonaccrual Loans				Total
Commercial, financial, and agricultural		$	247,451				10,560				1,960				1,842				261,813
Real estate – construction, land development & other land loans			335,068				8,762				7,892				2,945				354,667
Real estate – mortgage – residential (1-4 family) first mortgages			678,878				16,998				38,786				16,017				750,679
Real estate – mortgage – home equity loans / lines of credit			226,159				1,436				9,155				2,355				239,105
Real estate – mortgage – commercial and other			1,005,687				26,032				13,019				4,208				1,048,946
Installment loans to individuals			54,421				256				259				101				55,037
Purchased credit impaired			—				514				—				—				514
Total		$	2,547,664				64,558				71,071				27,468				2,710,761
Unamortized net deferred loan fees																			(49	)
Total loans																			2,710,712

 

 

Troubled Debt Restructurings

 

The restructuring of a loan is considered a “troubled debt restructuring” 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, restructuring amortization schedules and other actions intended to minimize potential losses.

 

The vast majority of the Company’s troubled debt restructurings modified related to interest rate reductions combined with restructured amortization schedules. The Company does not generally grant principal forgiveness.

 

All loans classified as troubled debt restructurings are considered to be impaired and are evaluated as such for determination of the allowance for loan losses. The Company’s troubled debt restructurings can be classified as either nonaccrual or accruing based on the loan’s payment status. The troubled debt restructurings that are nonaccrual are reported within the nonaccrual loan totals presented previously.

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended June 30, 2017 and 2016.

 

($ in thousands)		For three months ended June 30, 2017												For the three months ended June 30, 2016
		Number of Contracts				Pre- Modification Restructured Balances				Post- Modification Restructured Balances				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			—				—				—				—				—				—
Real estate – mortgage – home equity loans / lines of credit			—				—				—				—				—				—
Real estate – mortgage – commercial and other			3				1,000				1,000				—				—				—
Installment loans to individuals			—				—				—				—				—				—
TDRs – Nonaccrual
Commercial, financial, and agricultural			—				—				—				—				—				—
Real estate – construction, land development & other land loans			1				32				32				—				—				—
Real estate – mortgage – residential (1-4 family) first mortgages			1				215				215				—				—				—
Real estate – mortgage – home equity loans / lines of credit			—				—				—				—				—				—
Real estate – mortgage – commercial and other			—				—				—				—				—				—
Installment loans to individuals			—				—				—				—				—				—
Total TDRs arising during period			5			$	1,247			$	1,247				—			$	—			$	—
Total covered TDRs arising during period included above			—			$	—			$	—				—			$	—			$	—

 

 

The following table presents information related to loans modified in a troubled debt restructuring during the six months ended June 30, 2017 and 2016.

 

($ in thousands)		For six months ended June 30, 2017												For the six months ended June 30, 2016
		Number of Contracts				Pre- Modification Restructured Balances				Post- Modification Restructured Balances				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			—				—				—				—				—				—
Real estate – mortgage – home equity loans / lines of credit			—				—				—				—				—				—
Real estate – mortgage – commercial and other			5				3,550				3,525				—				—				—
Installment loans to individuals			—				—				—				—				—				—
TDRs – Nonaccrual
Commercial, financial, and agricultural			—				—				—				—				—				—
Real estate – construction, land development & other land loans			1				32				32				—				—				—
Real estate – mortgage – residential (1-4 family) first mortgages			1				215				215				—				—				—
Real estate – mortgage – home equity loans / lines of credit			—				—				—				—				—				—
Real estate – mortgage – commercial and other			—				—				—				—				—				—
Installment loans to individuals			—				—				—				—				—				—
Total TDRs arising during period			7			$	3,797			$	3,772				—			$	—			$	—
Total covered TDRs arising during period included above			—			$	—			$	—				—			$	—			$	—

 

 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended June 30, 2017 and 2016 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 three months ended June 30, 2017								For the three months ended June 30, 2016
		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			$	254				—			$	—
Total accruing TDRs that subsequently defaulted			1			$	254				—			$	—
Total covered accruing TDRs that subsequently defaulted included above			—			$	—				—			$	—

 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the six months ended June 30, 2017 and 2016 are presented in the table below.

 

($ in thousands)		For the six months ended June 30, 2017								For the six months ended June 30, 2016
		Number of Contracts				Recorded Investment				Number of Contracts				Recorded Investment
Accruing TDRs that subsequently defaulted
Commercial, financial, and agricultural			—			$	—				1			$	44
Real estate – mortgage – residential (1-4 family) first mortgages			2				880				—				—
Real estate – mortgage – commercial and other			—				—				1				21
Total accruing TDRs that subsequently defaulted			2			$	880				2			$	65
Total covered accruing TDRs that subsequently defaulted included above			—			$	—				1			$	44

 

 

Note 9 – Deferred Loan (Fees) Costs

 

The amount of loans shown on the Consolidated Balance Sheets includes net deferred loan (fees) costs of approximately ($808,000), ($49,000), and $1,074,000 at June 30, 2017, December 31, 2016, and June 30, 2016, respectively.

 

Note 10 – FDIC Indemnification Asset

 

The FDIC indemnification asset is the estimated amount that the Company will receive from the FDIC under loss share agreements associated with two FDIC-assisted failed bank acquisitions. See page 42 of the Company’s 2015 Annual Report on Form 10-K for a detailed explanation of this asset.

 

The FDIC indemnification asset was comprised of the following components as of the dates shown:

 

($ in thousands)		June 30, 2017				December 31, 2016				June 30, 2016
Receivable (payable) related to loss claims incurred (recoveries), not yet received (paid), net		$	—				—				(1,542	)
Receivable related to estimated future claims on loans			—				—				6,383
Receivable related to estimated future claims on foreclosed real estate			—				—				316
FDIC indemnification asset		$	—				—				5,157

 

The following presents a rollforward of the FDIC indemnification asset for the first half of 2016.

 

($ in thousands)
Balance at January 1, 2016		$	8,439
Decrease related to favorable changes in loss estimates			(2,246	)
Increase related to reimbursable expenses			205
Cash paid (received)			738
Related to accretion of loan discount			(2,005	)
Other			26
Balance at June 30, 2016		$	5,157

 

Note 11 – Goodwill and Other Intangible Assets

 

The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of June 30, 2017, December 31, 2016, and June 30, 2016 and the carrying amount of unamortized intangible assets as of those same dates.

 

		June 30, 2017								December 31, 2016								June 30, 2016
($ in thousands)		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
Amortizable intangible assets:
Customer lists		$	2,369				866				2,369				746				2,369				624
Core deposit premiums			18,520				9,404				9,730				8,143				8,560				7,660
Other			1,032				381				1,032				224				1,032				65
Total		$	21,921				10,651				13,131				9,113				11,961				8,349
SBA servicing asset		$	862								415								—
Unamortizable intangible assets:
Goodwill		$	139,124								75,042								73,541

 

Activity related to transactions during the periods presented includes the following:

 

(1)

In connection with the January 1, 2016 acquisition of Bankingport, Inc., an insurance agency located in Sanford, North Carolina, the Company recorded $1,693,000 in goodwill, $591,000 in a customer list intangible, and $92,000 in other amortizable intangible assets.

(2)

In connection with the May 5, 2016 acquisition of SBA Complete, Inc., an SBA loan consulting firm, the Company recorded $4,333,000 in goodwill, $1,100,000 in a customer list intangible, and $940,000 in other amortizable intangible assets.

(3)

In connection with the branch exchange transaction with First Community Bank in Bluefield, Virginia, on July 15, 2016, the Company recorded a net increase of $1,961,000 in goodwill and $1,170,000 in core deposit premiums.

(4)

In connection with the Carolina Bank acquisition on March 3, 2017, the Company recorded a net increase of $65,302,000 in goodwill and $8,790,000 in core deposit premiums.

 

In addition to the above acquisition related activity, the Company recorded $415,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the third and fourth quarters of 2016. During the first half of 2017, the Company recorded an additional $513,000 in servicing assets, as well as $66,000 in amortization expense. Servicing assets are recorded at fair value and amortized as a reduction of service fee income over the expected lives of the related loans.

 

Amortization expense of all intangible assets totaled $1,031,000 and $261,000 for the three months ended June 30, 2017 and 2016, respectively, and $1,607,000 and $447,000 for the six months ended June 30, 2017 and 2016, respectively.

 

The following table presents the estimated amortization expense related to amortizable intangible assets, excluding SBA servicing assets, for the last two quarters of calendar year 2017 and for each of the four calendar years ending December 31, 2021 and the estimated amount amortizable thereafter. These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets.

 

($ in thousands)		Estimated Amortization Expense
July 1 to December 31, 2017		$	1,615
2018			2,862
2019			2,314
2020			1,750
2021			1,288
Thereafter			1,441
Total		$	11,270

 

 

Note 12 – Pension Plans

 

The Company has historically sponsored two defined benefit pension plans – a qualified retirement plan (the “Pension Plan”) which was generally available to all employees, and a Supplemental Executive Retirement Plan (the “SERP”), which was for the benefit of certain senior management executives of the Company. Effective December 31, 2012, the Company froze both plans for all participants. Although no previously accrued benefits were lost, employees no longer accrue benefits for service subsequent to 2012.

 

The Company recorded pension income totaling $241,000 and $162,000 for the three months ended June 30, 2017 and 2016, respectively, which primarily related to investment income from the Pension Plan’s assets. The following table contains the components of the pension income.

 

		For the Three Months Ended June 30,
		2017				2016				2017				2016				2017 Total				2016 Total
($ in thousands)		Pension Plan				Pension Plan				SERP				SERP				Both Plans				Both Plans
Service cost		$	—				—				32				27				32				27
Interest cost			350				376				53				59				403				435
Expected return on plan assets			(730	)			(675	)			—				—				(730	)			(675	)
Amortization of transition obligation			—				—				—				—				—				—
Amortization of net (gain)/loss			62				60				(8	)			(9	)			54				51
Amortization of prior service cost			—				—				—				—				—				—
Net periodic pension (income)/cost		$	(318	)			(239	)			77				77				(241	)			(162	)

 

The Company recorded pension income totaling $403,000 and $325,000 for the six months ended June 30, 2017 and 2016, respectively, which primarily related to investment income from the Pension Plan’s assets. The following table contains the components of the pension income.

 

		For the Six Months Ended June 30,
		2017				2016				2017				2016				2017 Total				2016 Total
($ in thousands)		Pension Plan				Pension Plan				SERP				SERP				Both Plans				Both Plans
Service cost – benefits earned during the period		$	—				—				59				53				59				53
Interest cost			725				752				113				118				838				870
Expected return on plan assets			(1,405	)			(1,350	)			—				—				(1,405	)			(1,350	)
Amortization of transition obligation			—				—				—				—				—				—
Amortization of net (gain)/loss			122				120				(17	)			(18	)			105				102
Amortization of prior service cost			—				—				—				—				—				—
Net periodic pension cost (income)		$	(558	)			(478	)			155				153				(403	)			(325	)

 

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. The contributions are invested to provide for benefits under the Pension Plan. The Company does not expect to contribute to the Pension Plan in 2017.

 

The Company’s funding policy with respect to the SERP is to fund the related benefits from the operating cash flow of the Company.

 

Note 13 – 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. The components of accumulated other comprehensive income (loss) for the Company are as follows:

 

($ in thousands)		June 30, 2017				December 31, 2016				June 30, 2016
Unrealized gain (loss) on securities available for sale		$	252				(3,085	)			1,722
Deferred tax asset (liability)			(93	)			1,138				(671	)
Net unrealized gain (loss) on securities available for sale			159				(1,947	)			1,051
Additional pension asset (liability)			(4,907	)			(5,012	)			(4,555	)
Deferred tax asset (liability)			1,816				1,852				1,776
Net additional pension asset (liability)			(3,091	)			(3,160	)			(2,779	)
Total accumulated other comprehensive income (loss)		$	(2,932	)			(5,107	)			(1,728	)

 

The following table discloses the changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2017 (all amounts are net of tax).

 

($ in thousands)		Unrealized Gain (Loss) on Securities Available for Sale				Additional Pension Asset (Liability)				Total
Beginning balance at January 1, 2017		$	(1,947	)			(3,160	)			(5,107	)
Other comprehensive income (loss) before reclassifications			1,958				—				1,958
Amounts reclassified from accumulated other comprehensive income			148				69				217
Net current-period other comprehensive income (loss)			2,106				69				2,175
Ending balance at June 30, 2017		$	159				(3,091	)			(2,932	)

 

The following table discloses the changes in accumulated other comprehensive income (loss) for the six months ended June 30, 2016 (all amounts are net of tax).

 

($ in thousands)		Unrealized Gain (Loss) on Securities Available for Sale				Additional Pension Asset (Liability)				Total
Beginning balance at January 1, 2016		$	(709	)			(2,841	)			(3,550	)
Other comprehensive income (loss) before reclassifications			1,762				—				1,762
Amounts reclassified from accumulated other comprehensive income			(2	)			62				60
Net current-period other comprehensive income (loss)			1,760				62				1,822
Ending balance at June 30, 2016		$	1,051				(2,779	)			(1,728	)

 

Note 14 – Fair Value

 

Relevant accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes 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 June 30, 2017.

 

($ in thousands)
Description of Financial Instruments		Fair Value at June 30, 2017				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		$	16,498				—				16,498				—
Mortgage-backed securities			156,601				—				156,601				—
Corporate bonds			34,397				—				34,397				—
Total available for sale securities		$	207,496				—				207,496				—
Nonrecurring
Impaired loans		$	15,848				—				—				15,848
Foreclosed real estate			11,196				—				—				11,196

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2016.

($ in thousands)
Description of Financial Instruments		Fair Value at December 31, 2016				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		$	17,490				—				17,490				—
Mortgage-backed securities			148,065				—				148,065				—
Corporate bonds			33,600				—				33,600				—
Equity securities			174				—				174				—
Total available for sale securities		$	199,329				—				199,329				—
Nonrecurring
Impaired loans		$	12,284				—				—				12,284
Foreclosed real estate			9,532				—				—				9,532

 

 

The following is a description of the valuation methodologies used for instruments measured at fair value.

 

Securities Available for Sale — When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy. If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy. Most of the fair values for the Company’s Level 2 securities are determined by 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, collateralized mortgage 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. Further, the Company validates the fair values for a sample of securities in the portfolio by comparing the fair values provided by the bond accounting provider to prices from other independent sources for the same or similar securities. The Company analyzes unusual or significant variances and conducts additional research with the portfolio manager, if necessary, and takes appropriate action based on its findings.

 

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 recurring or non-recurring basis as of June 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)
Description		Fair Value at June 30, 2017				Valuation Technique		Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Impaired loans		$	15,848			Appraised value; PV of expected cash flows		Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell		0-10%
Foreclosed real estate			11,196			Appraised value; List or contract price		Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell		0-10%

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2016, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)
Description		Fair Value at December 31, 2016				Valuation Technique		Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Impaired loans		$	12,284			Appraised value; PV of expected cash flows		Discounts to reflect current market conditions, ultimate collectability, and estimated costs to sell		0-10%
Foreclosed real estate			9,532			Appraised value; List or contract price		Discounts to reflect current market conditions, abbreviated holding period and estimated costs to sell		0-10%

 

Transfers of assets or liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There were no transfers between Level 1 and Level 2 for assets or liabilities measured on a recurring basis during the three or six months ended June 30, 2017 or 2016.

 

For the six months ended June 30, 2017 and 2016, the increase in the fair value of securities available for sale was $3,102,000 and $2,888,000, respectively, which is included in other comprehensive income (net of tax expense of $1,144,000 and $1,126,000, respectively). Fair value measurement methods at June 30, 2017 and 2016 are consistent with those used in prior reporting periods.

 

The carrying amounts and estimated fair values of financial instruments at June 30, 2017 and December 31, 2016 are as follows:

 

				June 30, 2017								December 31, 2016
($ 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		$	80,234				80,234				71,645				71,645
Due from banks, interest-bearing		Level 1			337,326				337,326				234,348				234,348
Securities available for sale		Level 2			207,496				207,496				199,329				199,329
Securities held to maturity		Level 2			127,866				129,697				129,713				130,195
Presold mortgages in process of settlement		Level 1			13,071				13,071				2,116				2,116
Total loans, net of allowance		Level 3			3,351,951				3,293,944				2,686,931				2,650,820
Accrued interest receivable		Level 1			10,830				10,830				9,286				9,286
Bank-owned life insurance		Level 1			87,501				87,501				74,138				74,138
Deposits		Level 2			3,644,330				3,640,874				2,947,353				2,944,968
Borrowings		Level 2			355,405				343,754				271,394				263,255
Accrued interest payable		Level 2			1,014				1,014				539				539

 

Fair value methods and assumptions are set forth below for the Company’s financial instruments.

 

Cash and Amounts Due from Banks, Presold Mortgages in Process of Settlement, Accrued Interest Receivable, and Accrued Interest Payable - The carrying amounts approximate their fair value because of the short maturity of these financial instruments.

 

Available for Sale and Held to Maturity Securities - Fair values are provided by a third-party and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or matrix pricing.

 

Loans - For nonimpaired loans, fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, financial and agricultural, real estate construction, real estate mortgages and installment loans to individuals. Each loan category is further segmented into fixed and variable interest rate terms. The fair value for each category is determined by discounting scheduled future cash flows using current interest rates offered on loans with similar risk characteristics. Fair values for impaired loans are primarily based on estimated proceeds expected upon liquidation of the collateral or the present value of expected cash flows.

 

Bank-Owned Life Insurance – The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the issuer.

 

Deposits - The fair value of deposits with no stated maturity, such as noninterest-bearing checking accounts, savings accounts, interest-bearing checking accounts, and money market accounts, is equal to the amount payable on demand as of the valuation date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered in the marketplace for deposits of similar remaining maturities.

 

Borrowings - The fair value of borrowings is based on the discounted value of the contractual cash flows. The discount rate is estimated using the rates currently offered by the Company’s lenders for debt of similar maturities.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no highly liquid market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include net premises and equipment, intangible and other assets such as deferred income taxes, prepaid expense accounts, income taxes currently payable and other various accrued expenses. In addition, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

 

Note 15 – Series C Preferred Stock

 

On December 21, 2012, the Company issued 2,656,294 shares of its common stock and 728,706 shares of the Company’s Series C Preferred Stock to certain accredited investors, each at the price of $10.00 per share, pursuant to a private placement transaction. Net proceeds from this sale of common and preferred stock were $33.8 million and were used to strengthen the Company’s balance sheet in anticipation of a planned disposition of certain classified loans and write-down of foreclosed real estate.

 

On December 22, 2016, the Company and the holder of the Series C Preferred Stock entered into an agreement to effectively convert the preferred stock into common stock. The Company exchanged 728,706 shares of preferred stock for the same number of shares of the Company’s common stock. As a result of the exchange, the Company has no shares of preferred stock currently outstanding.

 

The Series C Preferred Stock qualified as Tier 1 capital and was Convertible Perpetual Preferred Stock, with dividend rights equal to the Company’s Common Stock. The Series C Preferred Stock was non-voting, except in limited circumstances.

 

The Series C Preferred Stock paid a dividend per share equal to that of the Company’s common stock. During the three and six months ended June 30, 2016, the Company accrued approximately $59,000 and $117,000, respectively, in preferred dividend payments for the Series C Preferred Stock.

 

Note 16 – Pending Acquisition

 

On May 1, 2017, the Company announced the signing of a definitive merger agreement to acquire ASB Bancorp, Inc. (“ASB Bancorp”) the parent company of Asheville Savings Bank, SSB, in a cash and stock transaction with a total value of approximately $175 million, or $43.12 per share based on the Company’s closing share price on April 28, 2017. Subject to the terms of the merger agreement, ASB Bancorp shareholders will receive 1.44 shares of First Bancorp's common stock or $41.90 in cash, or a combination thereof, for each share of ASB Bancorp common stock. The total consideration will be prorated as necessary to ensure that 90% of the total outstanding shares of ASB Bancorp common stock will be exchanged for First Bancorp common stock and 10% of the total outstanding shares of ASB Bancorp common stock will be exchanged for cash, provided that the maximum number of shares of First Bancorp common stock to be issued in exchange for ASB Bancorp common stock will not exceed 19.9% of the number of shares of First Bancorp common stock issued and outstanding immediately before the closing of the merger.

 

Asheville Savings Bank currently operates 13 banking locations in the Asheville, Marion and Brevard markets. Asheville Savings Bank reported assets of $801 million, gross loans of $614 million and deposits of $677 million as of June 30, 2017.  The acquisition complements the Company’s existing three branches in the Asheville market.

 

The merger agreement has been unanimously approved by the boards of directors of each company.  The transaction is expected to close in the fourth quarter of 2017 and is subject to customary conditions, including regulatory approvals and approval by ASB Bancorp’s shareholders.

 

Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

 

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 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. 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.

 

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 and are excluded from the allowance for loan losses. 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.”

 

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 “Summary of Loan Loss Experience” below.

 

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, 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 the SBA 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.

 

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, on at least an annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including 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.

 

In our 2016 goodwill impairment evaluation, we concluded that our goodwill was not 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.

 

Current Accounting Matters

 

See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted.

 

RESULTS OF OPERATIONS

 

Overview

 

Net income available to common shareholders for the second quarter of 2017 was $11.2 million, or $0.45 per diluted common share, an increase of 21.6% in earnings per share from the $7.6 million, or $0.37 per diluted common share, recorded in the second quarter of 2016.

 

For the six months ended June 30, 2017, we recorded net income available to common shareholders of $18.7 million, or $0.80 per diluted common share, an increase of 14.3% in earnings per share from the $14.4 million, or $0.70 per diluted common share, for the six months ended June 30, 2016. The 2017 results were impacted by strong balance sheet growth and favorable earnings trends.

 

Comparisons for the financial periods presented are significantly impacted by our March 3, 2017 acquisition of Carolina Bank, which operated eight branches and three mortgage loan offices, primarily in the Triad region of North Carolina (consists of Greensboro, Winston-Salem, and High Point and the surrounding areas). See Note 4 to the consolidated financial statements for more information on this transaction.

 

Net Interest Income and Net Interest Margin

 

Net interest income for the second quarter of 2017 was $39.9 million, a 26.6% increase from the $31.5 million recorded in the second quarter of 2016. Net interest income for the first six months of 2017 amounted to $74.2 million, a 20.2% increase from the $61.7 million recorded in the comparable period of 2016. The increase in net interest income was primarily due to higher amounts of loans outstanding as a result of internal growth, as well as the acquisition of Carolina Bank.

 

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the second quarter of 2017 was 4.08% compared to 4.21% for the second quarter of 2016. For the six month period ended June 30, 2017, our net interest margin was 4.08% compared to 4.14% for the same period in 2016.

 

We recorded loan discount accretion amounting to $2.0 million in the second quarter of 2017, compared to $1.7 million in the second quarter of 2016. For the first six months of 2017 and 2016, loan discount accretion amounted to $3.3 million and $2.7 million, respectively.

 

Provision for Loan Losses and Asset Quality

 

We recorded no provision for loan losses in the second quarter of 2017 compared to a total negative provision for loan losses of $0.3 million in the second quarter of 2016. For the six months ended June 30, 2017, we recorded total provision for loan losses of $0.7 million compared to a total negative provision for loan losses of $23,000 in the same period of 2016.

 

For periods prior to the third quarter of 2016, our provision for loan losses was disclosed in separate line items between covered loans and non-covered loans. Generally, we recorded provisions for loan losses on non-covered loans as a result of net charge-offs and loan growth, while significant recoveries in our covered loan portfolios resulted in negative provisions for loan losses. Upon the termination of the FDIC loss share agreements, effective September 22, 2016, all loans became non-covered.

 

Noninterest Income

 

Total noninterest income was $11.9 million and $5.9 million for the three months ended June 30, 2017 and June 30, 2016, respectively. For the six months ended June 30, 2017, noninterest income amounted to $21.7 million compared to $10.9 million for the same period of 2016.

 

Core noninterest income for the second quarter of 2017 was $11.6 million, an increase of 42.1% from the $8.2 million reported for the second quarter of 2016. For the first six months of 2017, core noninterest income amounted to $21.4 million, a 38.0% increase from the $15.5 million recorded in the comparable period of 2016. Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgage loans, iv) commissions from sales of insurance and financial products, v) SBA consulting fees, vi) SBA loan sale gains, and vii) bank-owned life insurance income.

 

Noninterest Expenses

 

Noninterest expenses amounted to $35.1 million in the second quarter of 2017 compared to $26.1 million recorded in the second quarter of 2016. Noninterest expenses for the six months ended June 30, 2017 amounted to $67.2 million compared to $50.9 million in 2016. The majority of the increase in noninterest expenses in 2017 relates to the Company’s acquisition of Carolina Bank.

 

Balance Sheet and Capital

 

Total assets at June 30, 2017 amounted to $4.5 billion, a 30.6% increase from a year earlier. Total loans at June 30, 2017 amounted to $3.4 billion, a 29.9% increase from a year earlier, and total deposits amounted to $3.6 billion at June 30, 2017, a 26.9% increase from a year earlier.

 

In addition to the growth realized from the acquisition of Carolina Bank in March 2017, we have experienced strong organic loan and deposit growth during 2017. For the first half of 2017, organic loan growth (excludes loan balances assumed from Carolina Bank) amounted to $167.9 million, or 12.5% annualized. For the first half of 2017, organic deposit growth amounted to $111.6 million, or 7.6% annualized. The strong growth was a result of ongoing internal initiatives to drive loan and deposit growth, including our recent expansion into higher growth markets. Just over half of the loan growth noted above came from the recently-entered North Carolina markets of Charlotte, Raleigh, and the Triad.

 

We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at June 30, 2017 of 12.61%, a decline from 14.10% at June 30, 2016, but still in excess of the 10.00% minimum to be considered well-capitalized. Our tangible common equity to tangible assets ratio was 7.98% at June 30, 2017, a decrease of 20 basis points from a year earlier. The decreases in the capital ratios are primarily due to the acquisition of Carolina Bank.

 

Note Regarding Components of Earnings

 

For the periods in 2016 presented, our results of operations were significantly affected by the accounting for two FDIC-assisted failed bank acquisitions. In the discussion above and in the accompanying tables, the term “covered” is used to describe assets that were included in FDIC loss share agreements, while the term “non-covered” refers to our legacy assets, which are not included in any type of loss share arrangement. As previously discussed, all loss share agreements were terminated in the third quarter of 2016 and thus the entire loan portfolio is now classified as non-covered. Certain prior period disclosures will continue to present the breakout of the loan portfolio between covered and non-covered. See the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission for additional discussion regarding the accounting and presentation related to the Company’s two FDIC-assisted failed bank acquisitions.

 

Components of Earnings

 

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended June 30, 2017 amounted to $39.9 million, an increase of $8.4 million, or 26.6%, from the $31.5 million recorded in the second quarter of 2016. Net interest income on a tax-equivalent basis for the three month period ended June 30, 2017 amounted to $40.6 million, an increase of $8.5 million, or 26.7%, from the $32.1 million recorded in the second quarter of 2016. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable investments that may have existed during those periods.

 

		Three Months Ended June 30,
($ in thousands)		2017				2016
Net interest income, as reported		$	39,916				31,538
Tax-equivalent adjustment			693				517
Net interest income, tax-equivalent		$	40,609				32,055

 

 

Net interest income for the six month period ended June 30, 2017 amounted to $74.2 million, an increase of $12.5 million, or 20.2%, from the $61.7 million recorded in the first half of 2016. Net interest income on a tax-equivalent basis for the six month period ended June 30, 2017 amounted to $75.5 million, an increase of $12.8 million, or 20.4%, from the $62.7 million recorded in the comparable period of 2016.

 

		Six Months Ended June 30,
($ in thousands)		2017				2016
Net interest income, as reported		$	74,212				61,733
Tax-equivalent adjustment			1,278				976
Net interest income, tax-equivalent		$	75,490				62,709

 

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 (tax-equivalent net interest income divided by average interest-earning assets).

 

For the three and six months ended June 30, 2017, the higher net interest income compared to the same period of 2016 was due primarily to growth in loans outstanding.

 

The following table presents net interest income analysis on a tax-equivalent basis.

 

		For the Three Months Ended June 30,
		2017												2016
($ in thousands)		Average Volume				Average Rate				Interest Earned or Paid				Average Volume				Average Rate				Interest Earned or Paid
Assets
Loans (1)		$	3,327,391				4.78%			$	39,656			$	2,565,791				4.83%			$	30,809
Taxable securities			292,333				2.75%				2,002				332,269				2.37%				1,961
Non-taxable securities (2)			60,252				7.46%				1,120				49,941				7.64%				949
Short-term investments			309,617				0.96%				742				116,958				0.61%				177
Total interest-earning assets			3,989,593				4.38%				43,520				3,064,959				4.45%				33,896
Cash and due from banks			74,918												57,335
Premises and equipment			97,353												76,190
Other assets			286,541												174,992
Total assets		$	4,448,405											$	3,373,476
Liabilities
Interest bearing checking		$	689,406				0.06%			$	108			$	582,980				0.06%			$	94
Money market deposits			791,967				0.18%				359				663,536				0.18%				290
Savings deposits			411,048				0.21%				218				196,679				0.05%				25
Time deposits >$100,000			488,141				0.72%				874				385,416				0.65%				622
Other time deposits			255,682				0.27%				173				281,000				0.36%				255
Total interest-bearing deposits			2,636,244				0.26%				1,732				2,109,611				0.25%				1,286
Borrowings			307,964				1.54%				1,179				186,614				1.20%				555
Total interest-bearing liabilities			2,944,208				0.40%				2,911				2,296,225				0.32%				1,841
Noninterest bearing checking			974,700												696,294
Other liabilities			32,706												22,371
Shareholders’ equity			496,791												358,586
Total liabilities and shareholders’ equity		$	4,448,405											$	3,373,476
Net yield on interest-earning assets and net interest income							4.08%			$	40,609								4.21%			$	32,055
Interest rate spread							3.98%												4.13%
Average prime rate							4.04%												3.50%

(1)	Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

(2)

Includes tax-equivalent adjustments of $693,000 and $517,000 in 2017 and 2016, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 37% tax rate and is reduced by the related nondeductible portion of interest expense.

 

		For the Six Months Ended June 30,
		2017												2016
($ in thousands)		Average Volume				Average Rate				Interest Earned or Paid				Average Volume				Average Rate				Interest Earned or Paid
Assets
Loans (1)		$	3,115,335				4.75%			$	73,359			$	2,547,054				4.77%			$	60,382
Taxable securities			289,110				2.67%				3,826				308,567				2.47%				3,784
Non-taxable securities (2)			56,835				7.62%				2,148				50,646				7.36%				1,853
Short-term investments, principally federal funds			272,779				0.92%				1,240				140,600				0.57%				399
Total interest-earning assets			3,734,059				4.35%				80,573				3,046,867				4.38%				66,418
Cash and due from banks			71,107												56,439
Premises and equipment			89,765												75,950
Other assets			252,164												173,728
Total assets		$	4,147,095											$	3,352,984
Liabilities
Interest bearing checking		$	671,039				0.06%			$	215			$	585,462				0.07%			$	192
Money market deposits			760,345				0.18%				695				656,925				0.17%				563
Savings deposits			342,081				0.18%				297				193,284				0.05%				48
Time deposits >$100,000			462,460				0.69%				1,588				391,583				0.65%				1,274
Other time deposits			250,240				0.27%				339				286,077				0.37%				529
Total interest-bearing deposits			2,486,165				0.25%				3,134				2,113,331				0.25%				2,606
Borrowings			276,414				1.42%				1,949				186,504				1.19%				1,103
Total interest-bearing liabilities			2,762,579				0.37%				5,083				2,299,835				0.32%				3,709
Noninterest bearing checking			895,696												677,317
Other liabilities			32,405												21,797
Shareholders’ equity			456,415												354,035
Total liabilities and shareholders’ equity		$	4,147,095											$	3,352,984
Net yield on interest-earning assets and net interest income							4.08%			$	75,490								4.14%			$	62,709
Interest rate spread							3.98%												4.06%
Average prime rate							3.92%												3.50%

(1)	Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.

(2)

Includes tax-equivalent adjustments of $1,278,000 and $976,000 in 2017 and 2016, respectively, to reflect the tax benefit that we receive related to tax-exempt securities, which carry interest rates lower than similar taxable investments due to their tax exempt status. This amount has been computed assuming a 37% tax rate and is reduced by the related nondeductible portion of interest expense.

 

Average loans outstanding for the second quarter of 2017 were $3.327 billion, which was $761 million, or 29.7%, higher than the average loans outstanding for the second quarter of 2016 ($2.566 billion). Average loans for the six months ended June 30, 2017 were $3.115 billion, which was 22.3% higher than the average loans outstanding for the six months ended June 30, 2016 ($2.547 billion). The higher amount of average loans outstanding in 2017 was due to a combination of acquired growth and organic growth. The acquisition of Carolina Bank on March 3, 2017 added $497 million in loans as of the acquisition date. Also, due to our loan growth initiatives, including expansion into higher growth markets, and improved loan demand in our market areas, we have grown loan balances organically by $279 million over the past year.

 

The mix of our loan portfolio remained substantially the same at June 30, 2017 compared to December 31, 2016, with approximately 87% of our loans being real estate loans, 11% being commercial, financial, and agricultural loans, and the remaining 2% being consumer installment loans. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

 

Average total deposits outstanding for the second quarter of 2017 were $3.611 billion, which was $805 million, or 28.7%, higher than the average deposits outstanding for the second quarter of 2016 ($2.806 billion). Average deposits outstanding for the six months ended June 30, 2017 were $3.382 billion, which was 21.2% higher than the average deposits outstanding for the six months ended June 30, 2016 ($2.791 billion). As discussed previously, we acquired Carolina Bank during the first quarter of 2017, which had $585 million in deposits on the acquisition date. Including the acquisition, average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $2.113 billion for the six months ended June 30, 2016 to $2.669 billion for the six months ended June 30, 2017, representing growth of $556 million, or 26.3%. Average time deposits also increased for the first half of 2017 in comparison to the first half of 2016 – from $678 million to $713 million, an increase of $35 million, or 5.2%.

 

Average borrowings increased for the six months ended June 30, 2017 to $276.4 million from the $186.5 million for the same period of 2016. Carolina Bank had approximately $19 million in borrowings on the date of acquisition. Our cost of funds, which includes noninterest bearing checking accounts at a zero percent cost, was 0.28% in the first half of 2017 compared to 0.25% in the first half of 2016, with the increase being due to the increased costs associated with our higher levels of borrowings.

 

See additional information regarding changes in our loans and deposits in the section below entitled “Financial Condition.”

 

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the second quarter of 2017 was 4.08% compared to 4.21% for the second quarter of 2016. For the six month period ended June 30, 2017, our net interest margin was 4.08% compared to 4.14% for the same period in 2016. The net interest margins for both periods were impacted by higher amounts of loan discount accretion associated with acquired loan portfolios, as discussed below. Also, several loans with significant discounts paid off during each of the three month periods ended June 30, 2017 and 2016. Additionally, in the second quarter of 2016, we realized $332,000 in previously foregone interest related to the pay-off of two loans that had been on nonaccrual status. Also impacting our lower net interest margins in 2017 were higher funding costs, which were primarily caused by higher levels of borrowings.

 

Our net interest margin benefits from the net accretion of purchase accounting premiums/discounts associated with acquired loans and deposits. For the three months ended June 30, 2017 and 2016, we recorded $2.0 million and $1.7 million, respectively, in net accretion of purchase accounting premiums/discounts that increased net interest income. For the six months ended June 30, 2017 and 2016, we recorded $3.5 million and $2.7 million, respectively. Unaccreted loan discount has increased from $12.4 million at June 30, 2016 to $18.0 million at June 30, 2017 primarily as a result of the Carolina Bank acquisition.

 

See additional information regarding net interest income in the section entitled “Interest Rate Risk.”

 

We recorded no provision for loan losses in the second quarter of 2017 compared to a total negative provision for loan losses of $0.3 million in the second quarter of 2016. For the six months ended June 30, 2017, we recorded total provision for loan losses of $0.7 million compared to a total negative provision for loan losses of $23,000 in the same period of 2016.

 

For periods prior to the third quarter of 2016, our provision for loan losses was disclosed in separate line items between covered loans and non-covered loans. Generally, we recorded provisions for loan losses on non-covered loans as a result of net charge-offs and loan growth, while significant recoveries in our covered loan portfolios resulted in negative provisions for loan losses. Upon the termination of the FDIC loss share agreements, effective September 22, 2016, all loans became classified as non-covered.

 

Our provision for loan loss levels have been impacted by continued improvement in asset quality. Nonperforming assets amounted to $55.0 million at June 30, 2017, a decrease of 29.3% from the $77.9 million one year earlier. Our nonperforming assets to total assets ratio was 1.21% at June 30, 2017 compared to 2.25% at June 30, 2016. Also, our provision for loan loss levels were impacted by lower net charge-offs in 2017. Annualized net charge-offs as a percentage of average loans for the six months ended June 30, 2017 was 0.03%, compared to 0.20% for the same period of 2016.

 

Total noninterest income was $11.9 million and $5.9 million for the three months ended June 30, 2017 and June 30, 2016, respectively. For the six months ended June 30, 2017, noninterest income amounted to $21.7 million compared to $10.9 million for the same period of 2016.

 

As presented in the table below, core noninterest income for the second quarter of 2017 was $11.6 million, an increase of 42.1% from the $8.2 million reported for the second quarter of 2016. For the first six months of 2017, core noninterest income amounted to $21.4 million, a 38.0% increase from the $15.5 million recorded in the comparable period of 2016. Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgage loans, iv) commissions from sales of insurance and financial products, v) SBA consulting fees, vi) SBA loan sale gains, and vii) bank-owned life insurance income.

 

The following table presents our core noninterest income for the three and six month periods ending June 30, 2017 and 2016, respectively.

 

		For the Three Months Ended								For the Six Months Ended
$ in thousands		June 30, 2017				June 30, 2016				June 30, 2017				June 30, 2016
Service charges on deposit accounts		$	2,966				2,565				5,580				5,250
Other service charges, commissions, and fees			3,554				3,043				6,727				5,873
Fees from presold mortgage loans			1,511				410				2,279				781
Commissions from sales of insurance and financial products			1,038				937				1,878				1,875
SBA consulting fees			1,050				720				2,310				720
SBA loan sale gains			927				—				1,549				—
Bank-owned life insurance income			580				504				1,088				1,012
Core noninterest income		$	11,626				8,179				21,411				15,511

As shown in the table above, service charges on deposit accounts increased from $2.6 million in the second quarter of 2016 to $3.0 million in the second quarter of 2017. For the six months ended June 30, 2017, service charges on deposit accounts amounted to $5.6 million, which is a $0.3 million increase from the $5.3 million recorded in the comparable period of 2016. The increases for both periods are primarily due to the service charges from accounts assumed in the Carolina Bank acquisition.

 

Other service charges, commissions, and fees increased from $3.0 million in the second quarter of 2016 to $3.6 million in the second quarter of 2017. For the six months ended June 30, 2017, this revenue amounted to $6.7 million, which was a $0.9 million increase from the $5.9 million recorded in the comparable period of 2016. The increase in this line item was due to a combination of the Carolina Bank acquisition, as well as growth in interchange fees from debit and credit cards. We earn a small fee each time a customer uses a debit or credit card to make a purchase. Due to the growth in checking accounts and increased customer usage of debit cards, we have experienced increases in this line item. Interchange income from credit cards has also increased due to growth in the number and usage of credit cards, which we believe is a result of increased promotion of this product.

 

Fees from presold mortgages increased to $1.5 million for the second quarter of 2017 from $0.4 million in the second quarter of 2016. For the first half of 2017, fees from presold mortgages increased to $2.3 million from the $0.8 million recorded in the comparable period of 2016. Fees increased in 2017 primarily due to the acquisition of Carolina Bank in March 2017, which had a significant mortgage loan operation.

 

Commissions from sales of insurance and financial products amounted to approximately $1.0 million and $0.9 million for the second quarters of 2017 and 2016, respectively. For both the six months ended June 30, 2017 and 2016, commissions from sales of insurance and financial products amounted to $1.9 million. This line item includes property and casualty insurance commissions.

 

The primary reason for the increases in core noninterest income for the three and six months ended June 30, 2017 was the addition of SBA consulting fees and SBA loan sale gains beginning in 2016. On May 5, 2016, we completed the acquisition of a firm that specializes in consulting with financial institutions across the country related to SBA loan origination and servicing. We recorded $1.1 million and $2.3 million in SBA consulting fees related to this business during the three and six months ended June 30, 2017, respectively, in comparison to $0.7 million for the three and six months ended June 30, 2016. In the third quarter of 2016, we launched a national SBA lending division offering SBA loans to small business owners throughout the United States. The SBA division earned $0.9 million and $1.5 million from gains on the sales of the guaranteed portions of these loans during the three and six months ended June 30, 2017.

 

Bank-owned life insurance income was relatively unchanged for the periods presented, amounting to $0.5 million in each of the second quarters of 2017 and 2016, and $1.0 to $1.1 million for each of the six month periods in 2017 and 2016.

 

Within the noncore components of noninterest income, the largest variance related to indemnification asset expense. As discussed previously, in the third quarter of 2016, we terminated our FDIC loss share agreements, and thus there was no indemnification asset income or expense in 2017. For the three and six months ended June 30, 2016, indemnification asset expense amounted to $2.2 million and $4.5 million, respectively, which decreased noninterest income during the period.

 

During the six months ended June 30, 2017, we recorded $0.2 million in losses from sales of securities. For the comparable period of 2016, we recorded an insignificant amount of gains.

 

Other gains and losses for the periods presented represent the net effects of miscellaneous gains and losses that are non-routine in nature. Other gains of $0.5 million and $0.7 million for the three and six months ended June 30, 2017, respectively, primarily relate to the sale of a pool of default judgments that were sold to a third-party firm during the second quarter of 2017.

 

Noninterest expenses amounted to $35.1 million in the second quarter of 2017 compared to $26.1 million recorded in the second quarter of 2016. Noninterest expenses for the six months ended June 30, 2017 amounted to $67.2 million compared to $50.9 million in 2016. The majority of the increase in noninterest expenses in 2017 relates to the Company’s acquisition of Carolina Bank.

 

Salaries expense increased to $16.3 million in the second quarter of 2017 from the $12.6 million recorded in the second quarter of 2016. Salaries expense for the first half of 2017 amounted to $30.2 million compared to $24.0 million in 2016. The primary reason for the increase in salaries expense in 2017 was the addition of personnel acquired in the Carolina Bank acquisition. Also impacting salaries expense was the addition of the SBA consulting firm and the hiring of personnel related to the Company’s SBA lending division.

 

Employee benefits expense was $3.8 million in the second quarter of 2017 compared to $2.6 million in the second quarter of 2016. For the first six months of 2017, employee benefits expense amounted to $7.5 million compared to $5.3 million in 2016. This increase in 2017 was primarily due to the acquisition and growth initiatives discussed above.

 

Occupancy and equipment expense increased in 2017 primarily due to the acquisitions discussed above. For the three months ended June 30, 2017, occupancy and equipment expense totaled $3.7 million compared to $2.8 million in the second quarter of 2016. For the six months ended June 30, 2017, occupancy and equipment expense totaled $7.0 million compared to $5.6 million in the first half of 2016.

 

Merger and acquisition expenses amounted to $1.1 million and $0.5 million for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, merger and acquisition expenses amounted to $3.5 million and $0.7 million, respectively. Most of the merger expenses recorded related to the Carolina Bank acquisition.

 

Intangibles amortization expense increased from $0.3 million in the second quarter of 2016 to $1.0 million in the second quarter of 2017 and from $0.4 million in the first half of 2016 to $1.6 million in the first half of 2017, primarily as a result of the amortization of intangible assets that were recorded in connection with our acquisitions.

 

Other operating expenses amounted to $9.1 million and $7.5 million for the second quarters of 2017 and 2016, respectively, and $17.4 million in the first half of 2017 compared to $14.9 million in the first half of 2016. The increases were primarily due to the Company’s growth, including the acquisitions of the SBA consulting firm and Carolina Bank.

 

For the second quarter of 2017, the provision for income taxes was $5.6 million, an effective tax rate of 33.2%, compared to $4.0 million for the same period of 2016, which is an effective tax rate of 34.1%. For the first six months of 2017, the provision for income taxes was $9.3 million, an effective tax rate of 33.2%, compared to $7.3 million for the same period of 2016, which was an effective tax rate of 33.5%.

 

The Consolidated Statements of Comprehensive Income reflect other comprehensive income of $1.3 million during each of the second quarters of 2017 and 2016. During the six months ended June 30, 2017 and 2016, we recorded other comprehensive income of $2.1 million and $1.8 million, respectively. The primary component of other comprehensive income for the periods presented was changes in unrealized holding gains (losses) of our available for sale securities. Our available for sale securities portfolio is predominantly comprised of fixed rate bonds that generally increase in value when market yields for fixed rate bonds decrease and decline in value when market yields for fixed rate bonds increase. Management has evaluated any unrealized losses on individual securities at each period end and determined that there is no other-than-temporary impairment.

 

 

FINANCIAL CONDITION

 

Total assets at June 30, 2017 amounted to $4.53 billion, a 30.6% increase from a year earlier. Total loans at June 30, 2017 amounted to $3.38 billion, a 29.9% increase from a year earlier, and total deposits amounted to $3.64 billion, a 26.9% increase from a year earlier.

 

The following table presents information regarding the nature of changes in our levels of loans and deposits for the twelve months ended June 30, 2017 and for the first half of 2017.

 

July 1, 2016 to June 30, 2017		Balance at beginning of period				Internal Growth, net				Growth from Acquisitions (1)				Balance at end of period				Total percentage growth				Internal percentage growth
Loans outstanding		$	2,598,134				278,806				499,036				3,375,976				29.9%				10.7%
Deposits – Noninterest bearing checking			709,887				127,050				153,067				990,004				39.5%				17.9%
Deposits – Interest bearing checking			636,316				35,126				57,531				728,973				14.6%				5.5%
Deposits – Money market			638,125				51,769				91,192				781,086				22.4%				8.1%
Deposits – Savings			197,445				17,997				196,372				411,814				108.6%				9.1%
Deposits – Brokered			95,242				60,950				11,477				167,669				76.0%				64.0%
Deposits – Internet time			—				(1,469	)			11,248				9,779				—				—
Deposits – Time>$100,000			319,267				(42,618	)			28,067				304,716				-4.6%				-13.3%
Deposits – Time<$100,000			275,738				(38,955	)			13,506				250,289				-9.2%				-14.1%
Total deposits		$	2,872,020				209,850				562,460				3,644,330				26.9%				7.3%
January 1, 2017 to June 30, 2017
Loans outstanding		$	2,710,712				167,742				497,522				3,375,976				24.5%				6.2%
Deposits – Noninterest bearing checking			756,003				87,092				146,909				990,004				31.0%				11.5%
Deposits – Interest bearing checking			635,431				31,771				61,771				728,973				14.7%				5.0%
Deposits – Money market			683,680				(2,785	)			100,191				781,086				14.2%				-0.4%
Deposits – Savings			209,074				14,563				188,177				411,814				97.0%				7.0%
Deposits – Brokered			136,466				19,726				11,477				167,669				22.9%				14.5%
Deposits – Internet time			—				(1,469	)			11,248				9,779				—				—
Deposits – Time>$100,000			287,939				(20,006	)			36,783				304,716				5.8%				-6.9%
Deposits – Time<$100,000			238,760				(17,296	)			28,825				250,289				4.8%				-7.2%
Total deposits		$	2,947,353				111,596				585,381				3,644,330				23.6%				3.8%

 

(1)

For the twelve month period, in addition to the acquisition of Carolina Bank, which had $497.5 million in loans and $585.4 million in deposits this column includes the net impact of the branch exchange in July 2016, where we acquired $152.2 million in loans and $111.3 million in deposits, and sold $150.6 million in loans and $134.3 million in deposits. As a result, net loans increased $1.5 million and net deposits decreased by $22.9 million as a result of the transaction.

 

As derived from the table above, for the twelve months preceding June 30, 2017, our total loans increased $778 million, or 29.9%. The majority of loan growth from acquisitions is due to our acquisition of Carolina Bank in March 2017, which had $497.5 million in loans on the date of acquisition. Carolina Bank operated through eight branches predominately in the Triad region on North Carolina, and we expect these branches to enhance our recent expansion into this high-growth market. Internal loan growth was $278.8 million, or 10.7%, for the twelve months ended June 30, 2017 and was $167.7 million, or 6.2% (12.4% annualized), for the first half of 2017. Internal loan growth has been primarily driven by our recent expansion into high-growth markets and the hiring of experienced bankers in these areas. We expect continued growth in our loan portfolio for the remainder of 2017.

 

The mix of our loan portfolio remains substantially the same at June 30, 2017 compared to December 31, 2016. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan.

 

For both the six and twelve month periods ended June 30, 2017, we experienced net internal growth in total deposits. For these periods, increases in transaction deposit account balances (checking, money market, and savings) offset the declines in time deposits. Due to the low interest rate environment, some of our customers are shifting their funds from time deposits into transaction accounts, which do not pay a materially lower interest rate, while being more liquid. We also experienced net growth from acquisitions, primarily due to the Carolina Bank acquisition. We acquired $585.4 million in deposits from the Carolina Bank acquisition, and of that, $497.0 million were in the transaction deposit categories.

 

While retail deposits (non-brokered) have experienced growth over recent periods, the loan growth we have experienced has exceeded the retail deposit growth. This is largely associated with our recent growth and expansion into the larger markets of North Carolina – Charlotte, Raleigh, and the Triad. When initially entering markets such as these, our experience has been that we are able to capture loan market share faster than deposit market share. This imbalance has resulted in higher use of brokered deposits and borrowings to fund the loan growth. Total brokered deposits amounted to $167.6 million at June 30, 2017, which is a 76% increase from the $95.2 million outstanding a year earlier. Borrowings have increased from $206.4 million to $355.4 million over that same period.

 

Nonperforming Assets

 

Nonperforming assets include nonaccrual loans, troubled debt restructurings, loans past due 90 or more days and still accruing interest, nonperforming loans held for sale, and foreclosed real estate. Nonperforming assets are summarized as follows:

 

ASSET QUALITY DATA ($ in thousands)		As of/for the quarter ended June 30, 2017				As of/for the quarter ended December 31, 2016				As of/for the quarter ended June 30, 2016
Non-covered nonperforming assets
Nonaccrual loans		$	22,795				27,468				37,975
Restructured loans – accruing			21,019				22,138				29,271
Accruing loans >90 days past due			—				—				—
Total non-covered nonperforming loans			43,814				49,606				67,246
Foreclosed real estate			11,196				9,532				10,606
Total non-covered nonperforming assets		$	55,010				59,138				77,852
Total covered nonperforming assets included above (1)		$	—				—				8,024
Purchased credit impaired loans not included above (2)		$	16,846				—				—
Asset Quality Ratios – All Assets
Net charge-offs to average loans - annualized			-0.06%				0.12%				0.05%
Nonperforming loans to total loans			1.30%				1.83%				2.59%
Nonperforming assets to total assets			1.21%				1.64%				2.25%
Allowance for loan losses to total loans			0.71%				0.88%				1.00%
Allowance for loan losses to nonperforming loans			54.83%				47.94%				38.70%

 

(1)

All FDIC loss share agreements were terminated effective September 22, 2016 and, accordingly, assets previously covered under those agreements became non-covered on that date.

(2)

In the March 3, 2017 acquisition of Carolina Bank Holdings, Inc., the Company acquired $19.3 million in purchased credit impaired loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts.

 

We have reviewed the collateral for our nonperforming assets, including nonaccrual loans, and have included this review among the factors considered in the evaluation of the allowance for loan losses discussed below.

 

Consistent with the weak economy experienced in much of our market associated with the onset of the recession in 2008, we experienced higher levels of loan losses, delinquencies and nonperforming assets compared to our historical averages. As the economic conditions have improved in our market area over the past several years, we have experienced steady declines in our levels of nonperforming assets.

 

As noted in the table above, at June 30, 2017, total nonaccrual loans amounted to $22.8 million, compared to $27.5 million at December 31, 2016 and $38.0 million at June 30, 2016. “Restructured loans – accruing”, or troubled debt restructurings (“TDRs”), are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At June 30, 2017, total accruing TDRs amounted to $21.0 million, compared to $22.1 million at December 31, 2016 and $29.3 million at June 30, 2016.

 

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $11.2 million at June 30, 2017, $9.5 million at December 31, 2016, and $10.6 million at June 30, 2016. Our foreclosed property balances have generally been decreasing as a result of sales activity during the periods and the improvement in our overall asset quality. In the first quarter of 2017, we acquired Carolina Bank and assumed $3.1 million of foreclosed real estate in this transaction.

 

The following is the composition, by loan type, of all of our nonaccrual loans at each period end, as classified for regulatory purposes:

 

($ in thousands)		At June 30, 2017				At December 31, 2016				At June 30, 2016
Commercial, financial, and agricultural		$	1,027				1,842				2,870
Real estate – construction, land development, and other land loans			1,007				2,945				4,154
Real estate – mortgage – residential (1-4 family) first mortgages			15,262				16,017				21,156
Real estate – mortgage – home equity loans/lines of credit			1,942				2,355				2,759
Real estate – mortgage – commercial and other			3,451				4,208				6,821
Installment loans to individuals			106				101				215
Total nonaccrual loans		$	22,795				27,468				37,975
Total covered nonaccrual loans included above		$	—				—				4,194

 

The table above indicated decreases in most categories of nonaccrual loans. The decreases reflect stabilization in most of our market areas and our increased focus on the resolution of our nonperforming assets.

 

We believe that the fair values of the items of foreclosed real estate, less estimated costs to sell, equal or exceed their respective carrying values at the dates presented. The following table presents the detail of all of our foreclosed real estate at each period end:

 

($ in thousands)		At June 30, 2017				At December 31, 2016				At June 30, 2016
Vacant land		$	4,132				3,221				3,644
1-4 family residential properties			4,648				4,345				3,841
Commercial real estate			2,416				1,966				3,121
Total foreclosed real estate		$	11,196				9,532				10,606
Total covered foreclosed real estate included above		$	—				—				385

 

The following table presents geographical information regarding our nonperforming assets at June 30, 2017.

 

		As of June 30, 2017
($ in thousands)		Total Nonperforming Loans				Total Loans				Nonperforming Loans to Total Loans				Total Foreclosed Real Estate
Region (1)
Eastern Region (NC)		$	12,647			$	771,000				1.6%			$	1,187
Triangle Region (NC)			9,990				860,000				1.2%				1,757
Triad Region (NC)			8,459				946,000				0.9%				3,153
Charlotte Region (NC)			712				253,000				0.3%				336
Southern Piedmont Region (NC)			7,045				286,000				2.5%				1,136
Western Region (NC)			128				93,000				0.1%				1,023
South Carolina Region			2,841				138,000				2.1%				559
Virginia Region (2)			1,943				9,000				21.6%				2,045
Other			49				20,000				0.2%				—
Total		$	43,814			$	3,376,000				1.3%			$	11,196

 

(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

Charlotte North Carolina Region - Iredell, Cabarrus, Rowan, Mecklenburg

  Southern Piedmont North Carolina Region - Anson, Richmond, Scotland, Robeson, Bladen, Columbus, Cumberland

Western North Carolina Region - Buncombe

South Carolina Region - Chesterfield, Dillon, Florence

Virginia Region - Wythe, Washington, Montgomery, Roanoke

 

(2)	As part of the terms of a July 2016 branch exchange where we divested all of our Virginia branches, loans classified as substandard or below were not exchanged between the banks.

 

Summary of 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. The recoveries realized during the period are credited to this allowance.

 

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 our real estate loans are primarily personal and commercial loans where real estate provides additional security for the loan. Collateral for virtually all of these loans is located within our principal market area.

 

The weak economic environment that began in 2008 resulted in elevated levels of classified and nonperforming assets, which generally led to higher provisions for loan losses compared to historical averages. Over the past several years, we have seen ongoing signs of a recovering economy in most of our market areas. Although we continue to have an elevated level of past due and adversely classified assets compared to historic averages, we believe the severity of the loss rate inherent in our current inventory of classified loans is less than in the recession years.

 

For periods prior to the third quarter of 2016, the Company’s provision for loan losses was disclosed in separate line items between covered loans and non-covered loans. Generally, we had recorded provisions for loan losses on non-covered loans as a result of net charge-offs and loan growth, while significant recoveries in our previously covered loan portfolios resulted in negative provisions for loan losses. Upon the termination of the FDIC loss share agreements effective September 22, 2016, all loans became classified as non-covered.

 

We recorded no provision for loan losses in the second quarter of 2017 compared to a total negative provision for loan losses of $0.3 million in the second quarter of 2016. For the six months ended June 30, 2017, we recorded total provision for loan losses of $0.7 million compared to a total negative provision for loan losses of $23,000 in the same period of 2016. The negative provisions in 2016 were caused primarily by recoveries on covered loans. The provision for loan losses for non-covered loans amounted to $0.5 million in the second quarter of 2016 and $2.1 million for the first half of 2016.

 

 

For the periods indicated, the following table summarizes our balances of loans outstanding, average loans outstanding, changes in the allowance for loan losses arising from charge-offs and recoveries, and additions to the allowance for loan losses that have been charged to expense.

 

 

($ in thousands)		Six Months Ended June 30,				Twelve Months Ended December 31,				Six Months Ended June 30,
		2017				2016				2016
Loans outstanding at end of period		$	3,375,976				2,710,712				2,598,134
Average amount of loans outstanding		$	3,115,335				2,603,327				2,547,054
Allowance for loan losses, at beginning of year		$	23,781				28,583				28,583
Provision (reversal) for loan losses			723				(23	)			(23	)
			24,504				28,560				28,560
Loans charged off:
Commercial, financial, and agricultural			(1,204	)			(2,033	)			(778	)
Real estate – construction, land development & other land loans			(269	)			(1,101	)			(476	)
Real estate – mortgage – residential (1-4 family) first mortgages			(1,247	)			(3,894	)			(2,770	)
Real estate – mortgage – home equity loans / lines of credit			(578	)			(1,010	)			(775	)
Real estate – mortgage – commercial and other			(414	)			(1,088	)			(645	)
Installment loans to individuals			(359	)			(1,288	)			(517	)
Total charge-offs			(4,071	)			(10,414	)			(5,961	)
Recoveries of loans previously charged-off:
Commercial, financial, and agricultural			518				817				362
Real estate – construction, land development & other land loans			1,471				2,690				1,479
Real estate – mortgage – residential (1-4 family) first mortgages			636				1,207				443
Real estate – mortgage – home equity loans / lines of credit			130				279				148
Real estate – mortgage – commercial and other			698				1,286				735
Installment loans to individuals			139				406				257
Total recoveries			3,592				6,685				3,424
Net charge-offs			(479	)			(3,729	)			(2,537	)
Allowance removed related to sold loans			—				(1,050	)			—
Allowance for loan losses, at end of period		$	24,025				23,781				26,023
Ratios:
Net charge-offs as a percent of average loans (annualized)			0.03%				0.14%				0.20%
Allowance for loan losses as a percent of loans at end of  period			0.71%				0.88%				1.00%

 

The provision for loan losses that we record is driven by an allowance for loan loss mathematical model. The primary factors impacting this model are loan growth, net charge-off history, and asset quality trends. In 2017, the impact of strong organic loan growth, which would normally result in higher provisions for loan losses, was substantially offset by low levels of net charge-offs and improving asset quality trends.

 

The allowance for loan losses amounted to $24.0 million at June 30, 2017, compared to $23.8 million at December 31, 2016 and $26.0 million at June 30, 2016. The ratio of our allowance to total loans has declined from 1.00% at June 30, 2016 to 0.71% at June 30, 2017 as a result of the factors discussed above that impacted our relatively low levels of provision for loan losses, as well as applicable accounting guidance that does not allow us to record an allowance for loan losses upon the acquisition of loans. Thus, no allowance for loan losses was recorded for the approximately $497 million in loans acquired in the Carolina Bank acquisition – instead the acquired loans were recorded at their fair value, which would include the consideration of any expected losses. See Critical Accounting Policies above for further discussion. Unaccreted discount, which is available to absorb loan losses on a loan-by-loan basis, amounted to $18.0 million, $12.7 million, and $12.4 million at June 30, 2017, December 31, 2016, and June 30, 2016, respectively. The ratio of allowance for loan losses plus unaccreted discount was 1.24%, 1.34%, and 1.48% at June 30, 2017, December 31, 2016, and June 30, 2016, respectively.

 

We believe our reserve levels are 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 reserve 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 amounts 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. See “Critical Accounting Policies – Allowance for Loan Losses” above.

 

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and value of other real estate. Such agencies may require us to recognize adjustments to the allowance or the carrying value of other real estate based on their judgments about information available at the time of their examinations.

 

Based on the results of our loan analysis and grading program and our evaluation of the allowance for loan losses at June 30, 2017, there have been no material changes to the allocation of the allowance for loan losses among the various categories of loans since December 31, 2016.

 

Liquidity, Commitments, and Contingencies

 

Our liquidity is determined by our ability to convert assets to cash or acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and to maintain required reserve levels, pay expenses and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold and other short-term investments. Our securities portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash.

 

In addition to internally generated liquidity sources, we have the ability to obtain borrowings from the following three sources - 1) an approximately $814 million line of credit with the Federal Home Loan Bank (of which $302 million was outstanding at June 30, 2017 and $225 million was outstanding at December 31, 2016), 2) a $35 million federal funds line with a correspondent bank (of which none was outstanding at June 30, 2017 or December 31, 2016), and 3) an approximately $110 million line of credit through the Federal Reserve Bank of Richmond’s discount window (of which none was outstanding at June 30, 2017 or December 31, 2016). In addition to the outstanding borrowings from the FHLB that reduce the available borrowing capacity of that line of credit, our borrowing capacity was reduced by $190 million at June 30, 2017 and $193 million at December 31, 2016, as a result of our pledging letters of credit for public deposits at each of those dates. Unused and available lines of credit amounted to $467 million at June 30, 2017 compared to $425 million at December 31, 2016.

 

Our overall liquidity has decreased slightly since June 30, 2016 but remains sufficient. Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings decreased from 19.8% at June 30, 2016 to 18.8% at June 30, 2017.

 

We believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.

 

The amount and timing of our contractual obligations and commercial commitments has not changed materially since December 31, 2016, detail of which is presented in Table 18 on page 90 of our 2016 Annual Report on Form 10-K.

 

We are not involved in any legal proceedings that, in our opinion, could have a material effect on our consolidated financial position. See Part II – Item 1 for additional information regarding legal proceedings.

 

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 derivative activities through June 30, 2017, and have no current plans to do so.

 

Capital Resources

 

We are regulated by the Board of Governors of the Federal Reserve Board (“Federal Reserve”) and are subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. Our banking subsidiary is also regulated by the North Carolina Office of the Commissioner of Banks. 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.

 

We must comply with regulatory capital requirements established by the Federal Reserve. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

The capital standards require us to maintain minimum ratios of “Common Equity Tier 1” capital to total risk-weighted assets, “Tier 1” 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 1 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 1 capital is comprised of Common Equity Tier 1 capital plus Additional Tier 1 Capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities. Total capital is comprised of Tier 1 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 regulations.

 

The capital conservation buffer requirement began to be phased in on January 1, 2016, at 0.625% of risk weighted assets, and will increase each year until fully implemented at 2.5% in January 1, 2019.

 

In addition to the risk-based capital requirements described above, we are subject to a leverage capital requirement, which calls for a minimum ratio of Tier 1 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 us of any requirement specifically applicable to us.

 

At June 30, 2017, our capital ratios exceeded the regulatory minimum ratios discussed above. The following table presents our capital ratios and the regulatory minimums discussed above for the periods indicated.

 

		June 30, 2017				December 31, 2016				June 30, 2016
Risk-based capital ratios:
Common equity Tier 1 to Tier 1 risk weighted assets			10.44%				10.92%				11.09%
Minimum required Common equity Tier 1 capital			4.50%				4.50%				4.50%
Tier I capital to Tier 1 risk weighted assets			11.91%				12.49%				13.08%
Minimum required Tier 1 capital			6.00%				6.00%				6.00%
Total risk-based capital to Tier II risk weighted assets			12.61%				13.36%				14.10%
Minimum required total risk-based capital			8.00%				8.00%				8.00%
Leverage capital ratios:
Tier 1 capital to quarterly average total assets			9.77%				10.17%				10.38%
Minimum required Tier 1 leverage capital			4.00%				4.00%				4.00%

 

Our bank subsidiary is also subject to capital requirements similar to those discussed above. The bank subsidiary’s capital ratios do not vary materially from our capital ratios presented above. At June 30, 2017, our bank subsidiary exceeded the minimum ratios established by the regulatory authorities.

 

Our capital ratios are generally lower at June 30, 2017 compared to prior periods due to the acquisition of Carolina Bank in March 2017 (see Note 4 to the Consolidated Financial Statements for more information on this transaction).

 

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 7.98% at June 30, 2017 compared to 8.16% at December 31, 2016 and 8.18% at June 30, 2016.

 

 

BUSINESS DEVELOPMENT MATTERS

 

The following is a list of business development and other miscellaneous matters affecting First Bancorp and First Bank, our bank subsidiary.

 

·

On August 4, 2017, the Company converted the data processing systems of Carolina Bank to First Bank, and the former Carolina Bank branches began to operate under the name “First Bank.” As part of this conversion, the Company consolidated four branches into two branches in Winston-Salem and consolidated two branches into one branch in Asheboro.

 

·

On June 15, 2017, the Company announced a quarterly cash dividend of $0.08 cents per share payable on July 25, 2017 to shareholders of record on June 30, 2017. This is the same dividend rate as the Company declared in the second quarter of 2016.

 

·

On May 1, 2017, the Company announced that it had reached an agreement to acquire ASB Bancorp, Inc., the parent company of Asheville Savings Bank, SSB, headquartered in Asheville, North Carolina. The merger consideration is a combination of cash and stock, with each share of ASB Bancorp, Inc. common stock being exchanged for either $41.90 in cash or 1.44 shares of First Bancorp stock, subject to the total consideration being 90% stock / 10% cash. This transaction is subject to regulatory approval and is expected to be completed during the fourth quarter of 2017.

 

SHARE REPURCHASES

 

We did not repurchase any shares of our common stock during the first six months of 2017. At June 30, 2017, we had approximately 214,000 shares available for repurchase under existing authority from our board of directors. We may repurchase these shares in open market and privately negotiated transactions, as market conditions and our liquidity warrants, subject to compliance with applicable regulations. See also Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds.”

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

 

INTEREST RATE RISK (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)

 

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). Over the past five calendar years, our net interest margin has ranged from a low of 4.03% (realized in 2016) to a high of 4.92% (realized in 2013). Until the end of 2015, the prime rate of interest had remained at 3.25% since 2008. In response to Federal Reserve actions, the prime rate increased to 3.50% in December 2015 and has since risen to 4.25% as of June 30, 2017. The consistency of our net interest margin is aided by the relatively low level of long-term interest rate exposure that we maintain. At June 30, 2017, approximately 75% of our interest-earning assets were 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.

 

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). At June 30, 2017, we had $1.1 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 June 30, 2017 are deposits totaling $1.92 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 six months), this 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. However, in the twelve-month horizon, the impact of having a higher level of interest-sensitive liabilities 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. As a result of the prolonged negative/fragile economic environment, the Federal Reserve took steps to suppress long-term interest rates in an effort to boost the housing market, increase employment, and stimulate the economy, which resulted in a flat interest rate curve. A flat interest rate curve is an unfavorable interest rate environment for many banks, including the Company, 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 somewhat, it currently remains relatively flat. This flat yield curve and the intense competition for high-quality loans in our market areas have limited our ability to charge higher rates on loans, and thus we continue to experience challenges in increasing our loan yields and net interest margin.

 

As it relates to deposits, as noted earlier, the Federal Reserve made no changes to the short term interest rates it sets directly from 2008 until December 2015, and during that time we were able to reprice many of our maturing time deposits at lower interest rates. We were also able to generally decrease the rates we paid on other categories of deposits as a result of declining short-term interest rates in the marketplace and an increase in liquidity that lessened our need to offer premium interest rates. However, as our average funding rate approached zero several years ago, meaningful further declines were not possible. Thus far, the four interest rate increases initiated by the Federal Reserve over the past 18 months have not resulted in significant competitive pressure to increase deposit rates.

 

As previously discussed in the section “Net Interest Income,” our net interest income has been impacted by certain purchase accounting adjustments related to 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, which amounted to $3.3 million and $2.7 million for the six months ended June 30, 2017 and 2016, respectively, is less predictable and could be materially different among periods. This is because of the magnitude of the discounts that were 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 $18.0 million at June 30, 2017.

 

Based on our most recent interest rate modeling, which assumes one interest rate increase for the remainder of 2017 (federal funds rate = 1.50%, prime = 4.50%), we project that our net interest margin will likely remain fairly stable for the remainder of the year. We expect the yields we earn on excess cash and investment security yields to increase as a result of the recent rate increases, while we expect loan yields to be stable, and deposit rates to gradually rise.

 

We have no market risk sensitive instruments held for trading purposes, nor do we maintain any foreign currency positions.

 

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.

 

Item 4 – 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. In addition, no change in our internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part II. Other Information

 

Item 1 – Legal Proceedings

 

From time to time, the Company is a party to routine legal proceedings within its normal course of business. Management believes that such routine legal proceedings taken together are immaterial to the Company’s financial condition or results of operations. Any non-routine legal proceedings are described in Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

On May 1, 2017, the Company and ASB Bancorp, Inc. entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) pursuant to which upon satisfaction of the conditions set forth in the Merger Agreement, ASB Bancorp will merge with and into the Company.

 

On July 19, 2017, a purported shareholder of ASB Bancorp filed a lawsuit in the United States District Court, Western District of North Carolina, against the Company, ASB Bancorp, and members of ASB Bancorp’s board of directors. The lawsuit alleges inadequate disclosures in ASB Bancorp’s proxy statement/prospectus and violations of the Securities Exchange Act of 1934. The lawsuit seeks, among other remedies, to enjoin the merger or, in the event the merger is completed, rescission of the merger or rescissory damages; to direct defendants to account for unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees.

 

As of the date of this filing, the Company cannot reasonably predict the outcome of the above-described lawsuit or, in the event of an adverse outcome, the potential loss or range of possible loss relating to the lawsuit.

 

Item 1A – Risk Factors

 

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Forward-Looking Statements” set forth in the forepart of this Form 10-Q, risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC.

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities
Period		Total Number of Shares Purchased (2)				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)				Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1, 2017 to April 30, 2017			—				—				—				214,241
May 1, 2017 to May 31, 2017			—				—				—				214,241
June 1, 2017 to June 30, 2017			—				—				—				214,241
Total			—				—				—				214,241

 

Footnotes to the Above Table

(1)

All shares available for repurchase are pursuant to publicly announced share repurchase authorizations. On July 30, 2004, the Company announced that its board of directors had approved the repurchase of 375,000 shares of the Company’s common stock. The repurchase authorization does not have an expiration date. There are no plans or programs the Company has determined to terminate prior to expiration, or under which we do not intend to make further purchases.

 

(2)

The table above does not include shares that were used by option holders to satisfy the exercise price of the call options issued by the Company to its employees and directors pursuant to the Company’s stock option plans. There were no such exercises during the three months ended June 30, 2017.

 

During the three months ended June 30, 2017, there were no unregistered sales of the Company’s securities.

 

 

Item 6 - Exhibits

 

The following exhibits are filed with this report or, as noted, are incorporated by reference. Except as noted below the exhibits identified have Securities and Exchange Commission 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

Second Amended and Restated Bylaws of the Company were filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed on March 9, 2017, 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.

 

31.1

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

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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, 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.

 

 

Copies of exhibits are available upon written request to: First Bancorp, Elizabeth B. Bostian, Secretary, 300 SW Broad Street, Southern Pines, North Carolina, 28387

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

		FIRST BANCORP
	August 9, 2017	BY:/s/ Richard H. Moore
		Richard H. Moore
		Chief Executive Officer
		(Principal Executive Officer),
		Treasurer and Director
	August 9, 2017	BY:/s/ Eric P. Credle
		Eric P. Credle
		Executive Vice President
		and Chief Financial Officer