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Section 1: 10-Q (10-Q)

 

 

 

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 March 31, 2019

 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol Name of each exchange on which registered:
Common Stock, No Par Value FBNC The Nasdaq Global Select Market

 

The number of shares of the registrant's Common Stock outstanding on April 30, 2019 was 29,746,455.

 

 

 

 

INDEX

FIRST BANCORP AND SUBSIDIARIES

 

   
  Page
   
Part I.  Financial Information  
   
Item 1 - Financial Statements  
   
Consolidated Balance Sheets - March 31, 2019 and March 31, 2018 (With Comparative Amounts at December 31, 2018) 4
   
Consolidated Statements of Income - For the Periods Ended March 31, 2019 and 2018 5
   
Consolidated Statements of Comprehensive Income - For the Periods Ended March 31, 2019 and 2018 6
   
Consolidated Statements of Shareholders’ Equity - For the Periods Ended March 31, 2019 and 2018 7
   
Consolidated Statements of Cash Flows - For the Periods Ended March 31, 2019 and 2018 8
   
Notes to Consolidated Financial Statements 9
   
Item 2 – Management’s Discussion and Analysis of Consolidated Results of Operations and Financial Condition 33
   
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 47
   
Item 4 – Controls and Procedures 49
   
Part II.  Other Information  
   
Item 1 – Legal Proceedings 49
   
Item 1A – Risk Factors 49
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 50
   
Item 6 – Exhibits 50
   
Signatures 52

 

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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 2018 Annual Report on Form 10-K.

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Part I. Financial Information

Item 1 - Financial Statements

 

First Bancorp and Subsidiaries

Consolidated Balance Sheets

 

($ in thousands)  March 31,
2019 (unaudited)
   December 31,
2018
   March 31,
2018 (unaudited)
 
ASSETS               
Cash and due from banks, noninterest-bearing  $80,620    56,050    78,217 
Due from banks, interest-bearing   366,187    406,848    448,515 
     Total cash and cash equivalents   446,807    462,898    526,732 
                
Securities available for sale   639,609    501,351    341,001 
Securities held to maturity (fair values of $90,280, $99,906, and $111,201)   90,903    101,237    112,058 
                
Presold mortgages in process of settlement   3,318    4,279    6,029 
                
Loans   4,303,787    4,249,064    4,113,785 
Allowance for loan losses   (21,095)   (21,039)   (23,298)
   Net loans   4,282,692    4,228,025    4,090,487 
                
Premises and equipment   137,725    119,000    115,542 
Accrued interest receivable   16,516    16,004    13,270 
Goodwill   234,368    234,368    231,681 
Other intangible assets   20,081    21,112    24,079 
Foreclosed real estate   6,390    7,440    11,307 
Bank-owned life insurance   102,524    101,878    99,786 
Other assets   69,315    66,524    69,555 
        Total assets  $6,050,248    5,864,116    5,641,527 
                
LIABILITIES               
Deposits:   Noninterest bearing checking accounts  $1,390,516    1,320,131    1,227,608 
Interest bearing checking accounts   922,254    916,374    896,189 
Money market accounts   1,079,002    1,035,523    1,035,261 
Savings accounts   417,812    432,389    445,405 
Time deposits of $100,000 or more   726,192    690,922    606,313 
Other time deposits   261,462    264,000    284,932 
     Total deposits   4,797,238    4,659,339    4,495,708 
Borrowings   406,125    406,609    407,059 
Accrued interest payable   2,341    1,976    1,306 
Other liabilities   56,405    31,962    31,804 
     Total liabilities   5,262,109    5,099,886    4,935,877 
                
Commitments and contingencies               
                
SHAREHOLDERS’ EQUITY               
Preferred stock, no par value per share.  Authorized: 5,000,000 shares               
     Issued & outstanding:  none, none, and none            
Common stock, no par value per share.  Authorized: 40,000,000 shares               
     Issued & outstanding:  29,746,455, 29,724,874, and 29,660,990 shares   434,948    434,453    433,305 
Retained earnings   360,455    341,738    282,038 
Stock in rabbi trust assumed in acquisition   (3,245)   (3,235)   (3,588)
Rabbi trust obligation   3,245    3,235    3,588 
Accumulated other comprehensive income (loss)   (7,264)   (11,961)   (9,693)
     Total shareholders’ equity   788,139    764,230    705,650 
          Total liabilities and shareholders’ equity  $6,050,248    5,864,116    5,641,527 

 

See accompanying notes to unaudited consolidated financial statements.

 

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First Bancorp and Subsidiaries

Consolidated Statements of Income

 

($ in thousands, except share data-unaudited)  Three Months Ended
March 31,
 
   2019   2018 
INTEREST INCOME          
Interest and fees on loans  $53,960    50,170 
Interest on investment securities:          
     Taxable interest income   4,737    2,586 
     Tax-exempt interest income   337    380 
Other, principally overnight investments   2,701    1,925 
     Total interest income   61,735    55,061 
           
INTEREST EXPENSE          
Savings, checking and money market accounts   2,009    979 
Time deposits of $100,000 or more   3,178    1,411 
Other time deposits   390    283 
Borrowings   2,797    1,881 
     Total interest expense   8,374    4,554 
           
Net interest income   53,361    50,507 
Provision (reversal) for loan losses   500    (3,659)
Net interest income after provision for loan losses   52,861    54,166 
           
NONINTEREST INCOME          
Service charges on deposit accounts   2,945    3,263 
Other service charges, commissions and fees   5,248    4,485 
Fees from presold mortgage loans   545    859 
Commissions from sales of insurance and financial products   2,029    1,940 
SBA consulting fees   1,263    1,141 
SBA loan sale gains   2,062    3,802 
Bank-owned life insurance income   646    623 
Foreclosed property gains (losses), net   (245)   (288)
Other gains (losses), net   82    4 
     Total noninterest income   14,575    15,829 
           
NONINTEREST EXPENSES          
Salaries expense   18,965    19,398 
Employee benefits expense   4,588    4,607 
   Total personnel expense   23,553    24,005 
Occupancy expense   2,754    2,802 
Equipment related expenses   1,369    1,252 
Merger and acquisition expenses   110    2,761 
Intangibles amortization expense   1,332    1,560 
Other operating expenses   10,153    11,106 
     Total noninterest expenses   39,271    43,486 
           
Income before income taxes   28,165    26,509 
Income tax expense   5,880    5,836 
           
Net income available to common shareholders  $22,285    20,673 
           
Earnings per common share:          
     Basic  $0.75    0.70 
     Diluted   0.75    0.70 
           
Dividends declared per common share  $0.12    0.10 
           
Weighted average common shares outstanding:          
     Basic   29,587,217    29,533,869 
     Diluted   29,743,395    29,624,150 

 

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income

 

   Three Months Ended
March 31,
 
($ in thousands-unaudited)  2019   2018 
         
Net income  $22,285    20,673 
Other comprehensive income (loss):          
   Unrealized gains (losses) on securities available for sale:          
Unrealized holding gains (losses) arising during the period, pretax   5,903    (7,290)
      Tax (expense) benefit   (1,380)   1,703 
Postretirement Plans:          
Amortization of unrecognized net actuarial loss   228    52 
       Tax benefit   (54)   (12)
Other comprehensive income (loss)   4,697    (5,547)
           
Comprehensive income  $26,982    15,126 

 

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity

 

 

($ in thousands, except per share - unaudited)

  Common Stock   Retained   Stock in
Rabbi
Trust
Assumed
in
Acquisi-
   Rabbi
Trust
   Accumulated
Other
Compre-
hensive
Income
   Total
Share-
holders’
 
   Shares   Amount   Earnings   tion   Obligation   (Loss)   Equity 
                             
Balances, January 1, 2018   29,639   $432,794    264,331    (3,581)   3,581    (4,146)   692,979 
                                    
Net income             20,673                   20,673 
Cash dividends declared ($0.10 per common share)             (2,966)                  (2,966)
Change in Rabbi Trust Obligation                  (7)   7          
Stock option exercises   8    108                        108 
Stock-based compensation   14    403                        403 
Other comprehensive income (loss)                            (5,547)   (5,547)
                                    
Balances, March 31, 2018   29,661   $433,305    282,038    (3,588)   3,588    (9,693)   705,650 
                                    
                                    
Balances, January 1, 2019   29,725   $434,453    341,738    (3,235)   3,235    (11,961)   764,230 
                                    
Net income             22,285                   22,285 
Cash dividends declared ($0.12 per common share)             (3,568)                  (3,568)
Change in Rabbi Trust Obligation                  (10)   10          
Stock-based compensation   24    586                        586 
Stock withheld for payment of taxes   (3)   (91)                       (91)
Other comprehensive income (loss)                            4,697    4,697 
                                    
Balances, March 31, 2019   29,746   $434,948    360,455    (3,245)   3,245    (7,264)   788,139 

 

See accompanying notes to unaudited consolidated financial statements.

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First Bancorp and Subsidiaries

Consolidated Statements of Cash Flows

 

   Three Months Ended
March 31,
 
($ in thousands-unaudited)  2019   2018 
Cash Flows From Operating Activities          
Net income  $22,285    20,673 
Reconciliation of net income  to net cash provided by operating activities:          
     Provision (reversal) for loan losses   500    (3,659)
     Net security premium amortization   459    685 
     Loan discount accretion   (1,419)   (2,111)
     Other purchase accounting accretion and amortization, net   (13)   (71)
     Foreclosed property (gains) losses and write-downs, net   245    288 
     Other losses (gains)   (82)   (4)
     Increase in net deferred loan costs   (325)   (786)
     Depreciation of premises and equipment   1,468    1,445 
     Amortization of operating lease right-of-use assets   475     
     Repayments of lease obligations   (455)    
     Stock-based compensation expense   403    231 
     Amortization of intangible assets   1,332    1,560 
     Fees/gains from sale of presold mortgages and SBA loans   (2,607)   (4,661)
     Origination of presold mortgage loans in process of settlement   (19,025)   (33,834)
     Proceeds from sales of presold mortgage loans in process of settlement   20,506    40,945 
     Origination of SBA loans for sale   (38,329)   (63,040)
     Proceeds from sales of SBA loans   30,678    50,996 
     (Increase) decrease in accrued interest receivable   (512)   824 
     (Increase) decrease in other assets   (4,194)   2,142 
     Increase in accrued interest payable   365    71 
     Increase (decrease) in other liabilities   5,254    (6,279)
          Net cash provided by operating activities   17,009    5,415 
           
Cash Flows From Investing Activities          
     Purchases of securities available for sale   (161,892)   (13,182)
     Proceeds from maturities/issuer calls of securities available for sale   29,313    7,764 
     Proceeds from maturities/issuer calls of securities held to maturity   10,098    6,159 
     Purchases of Federal Reserve and Federal Home Loan Bank stock, net   (308)   (6,099)
     Net increase in loans   (45,018)   (49,662)
     Proceeds from sales of foreclosed real estate   1,513    1,455 
     Purchases of premises and equipment   (1,450)   (1,224)
     Proceeds from sales of premises and equipment   279    540 
          Net cash used by investing activities   (167,465)   (54,249)
           
Cash Flows From Financing Activities          
     Net increase in deposits   137,957    88,869 
     Net decrease in borrowings   (529)   (529)
     Cash dividends paid – common stock   (2,972)   (2,372)
     Proceeds from stock option exercises       108 
     Stock withheld for payment of taxes   (91)    
          Net cash provided by financing activities   134,365    86,076 
           
(Decrease) increase in cash and cash equivalents   (16,091)   37,242 
Cash and cash equivalents, beginning of period   462,898    489,490 
           
Cash and cash equivalents, end of period  $446,807    526,732 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid (received) during the period for:          
     Interest  $8,009    4,483 
     Income taxes   103    (181)
Non-cash transactions:          
     Unrealized gain (loss) on securities available for sale, net of taxes   4,523    (5,587)
     Foreclosed loans transferred to other real estate   708    648 
     Initial recognition of operating lease right-of-use assets   19,459     
     Initial recognition of operating lease liabilities   19,459     

 

 

See accompanying notes to consolidated financial statements.

 

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First Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

 

(unaudited) For the Periods Ended March 31, 2019 and 2018  

 

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 March 31, 2019 and 2018 and the consolidated results of operations and consolidated cash flows for the periods ended March 31, 2019 and 2018. All such adjustments were of a normal, recurring nature. Reference is made to the 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“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 March 31, 2019 and 2018 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 2018 Annual Report on Form 10-K filed with the SEC contains a description of the accounting policies followed by the Company and a discussion of recent accounting pronouncements. The following paragraphs update that information as necessary.

 

Accounting Standards Adopted in 2019

 

In February 2016, the Financial Accounting Standards Board (“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 new standard was adopted by the Company on January 1, 2019. The guidance provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption.  The Company elected to apply the guidance as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Adoption of the guidance resulted in the recognition of lease liabilities and the recognition of right-of-use assets totaling $19.4 million as of the date of adoption. Lease liabilities and right-of-use assets are reflected in other liabilities and premises and equipment, respectively. The initial balance sheet gross-up upon adoption was related to operating leases of certain real estate properties. The Company has no finance leases or material subleases or leasing arrangements for which it is the lessor of property or equipment. The Company elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are leases or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. Adoption of this guidance did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 13 – Leases for additional disclosures related to leases.

 

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 were effective for the Company on January 1, 2019 and adoption did not have a material effect on its financial statements.

 

In June 2018, the FASB amended the Compensation—Stock Compensation Topic of the Accounting Standards Codification. The amendments expand the scope of this Topic to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments were effective for the Company on January 1, 2019 and the adoption did not have a material effect on its financial statements.

 

Accounting Standards Pending Adoption

 

In June 2016, the FASB issued guidance to change the accounting for credit losses. The guidance requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit 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 Company will apply the guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, the Company did not elect that option. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The Company continues its ongoing analysis on the impact of this guidance on its consolidated financial statements. In that regard, a cross-functional working group has been formed, under the direction of the Company's Chief Financial Officer. The working group is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. Implementation efforts continue with model development, ongoing system requirements evaluation and the identification of data and resource needs, among other things. The Company has also engaged a third-party vendor solution to assist in the application of the new guidance. The Company has provided core data to the vendor and continues to validate and enhance the data. The Company is currently running models under both the current methodology and the CECL methodology. While the Company is currently unable to reasonably estimate the impact of adopting the guidance, the impact of adoption is expected to be significantly influenced by the composition, characteristics and quality of loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

 

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In January 2017, the FASB amended the Goodwill and Other Intangibles topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. 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 this amendment to have a material effect on its financial statements.

 

In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this guidance and delay adoption of the additional disclosures until their effective date. The Company does not expect these amendments to have a material effect on its financial statements.

 

In August 2018, the FASB amended the Compensation - Retirement Benefits – Defined Benefit Plans Topic of the Accounting Standards Codification to improve disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans. The guidance removes disclosures that are no longer considered cost-beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

 

In March 2019, the FASB issued guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. 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 March 31, 2018 have been reclassified to conform to the presentation for March 31, 2019. 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 – Stock-Based Compensation Plans

 

The Company recorded total stock-based compensation expense of $403,000 and $231,000 for the three months ended March 31, 2019 and 2018, respectively. 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

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Index 

$94,000 and $54,000 of income tax benefits related to stock based compensation expense in its consolidated income statement for the three months ended March 31, 2019 and 2018, respectively.

 

At March 31, 2019, the Company had the following stock-based compensation plans: the First Bancorp 2014 Equity Plan and the First Bancorp 2007 Equity Plan. The Company’s shareholders approved each plan. The First Bancorp 2014 Equity Plan became effective upon the approval of shareholders on May 8, 2014. As of March 31, 2019, the First Bancorp 2014 Equity Plan was the only plan that had shares available for future grants, and there were 727,934 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 Plan’s 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 awards have been shares of restricted stock with service vesting conditions only. Compensation expense for these awards is recorded over the requisite service periods. Upon forfeiture, any previously recognized compensation cost is reversed. Upon a change in control (as defined in the plans), unless the awards remain outstanding or substitute equivalent awards are provided, the awards become immediately vested.

 

Certain of the Company’s stock awards 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 with service conditions only will vest. The Company issues new shares of common stock when options are exercised.

 

As it relates to director equity awards, the Company grants common shares, valued at approximately $32,000 to each non-employee director (currently 11 in total) in June of each year. Compensation expense associated with these director awards is recognized on the date of award since there are no vesting conditions.

 

The following table presents information regarding the activity for the first three months of 2019 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, 2019  129,251   $32.39 
           
Granted during the period   25,104    37.73 
Vested during the period   (5,266)   19.00 
Forfeited or expired during the period        
           
Nonvested at March 31, 2019   149,089   $33.76 

 

Total unrecognized compensation expense as of March 31, 2019 amounted to $2,737,000 with a weighted-average remaining term of 2.2 years. The Company expects to record $379,000 in compensation expense during each remaining quarter of 2019.

 

Page 11 

Index 

Prior to 2010, stock options were the primary form of equity based compensation utilized by the Company. The stock options had a term of ten years.

 

At March 31, 2019, there were 9,000 stock options outstanding each having an exercise price of $14.35 and an expiration date of June 1, 2019.

 

The following table presents information regarding the activity for the first three months of 2019 related to the Company’s outstanding stock options:

 

   Options Outstanding 
   Number of
Shares
   Weighted-
Average
Exercise
Price
   Weighted-
Average
Remaining
Contractual Term
(years)
   Aggregate
Intrinsic
Value
 
                 
Balance at January 1, 2019   9,000   $14.35           
                     
   Granted                  
   Exercised                  
   Forfeited                  
   Expired                  
                     
Outstanding at March 31, 2019   9,000   $14.35    0.17   $183,690 
                     
Exercisable at March 31, 2019   9,000   $14.35    0.17   $183,690 

 

During the three months ended March 31, 2019 and 2018, the Company received $0 and $108,000, respectively, as a result of stock option exercises.

 

Note 5 – 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.

 

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 contingently issuable shares, the number of shares that are included in the calculation of dilutive securities is based on the number of shares that are issuable if the end of the reporting period were the end of the contingency period.

 

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

 

Page 12 

Index 

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 March 31, 
   2019   2018 

 

($ in thousands except per

share amounts)

  Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
   Income
(Numer-
ator)
   Shares
(Denom-
inator)
   Per Share
Amount
 
                         
Basic EPS                              
Net income available to common shareholders  $22,285    29,587,217   $0.75   $20,673    29,533,869   $0.70 
                               
Effect of Dilutive Securities       156,178             90,281      
                               
Diluted EPS per common share  $22,285    29,743,395   $0.75   $20,673    29,624,150   $0.70 


For both the three months ended March 31, 2019 and 2018, there were no options that were antidilutive.

 

Note 6 – Securities

 

The book values and approximate fair values of investment securities at March 31, 2019 and December 31, 2018 are summarized as follows:

 

   March 31, 2019   December 31, 2018 
   Amortized   Fair   Unrealized   Amortized   Fair   Unrealized 
($ in thousands)  Cost   Value   Gains   (Losses)   Cost   Value   Gains   (Losses) 
                                 
Securities available for sale:                                        
  Government-sponsored enterprise securities  $78,995    78,887    84    (192)   82,995    82,662    63    (396)
  Mortgage-backed securities   533,360    526,948    1,089    (7,501)   396,995    385,551    39    (11,483)
  Corporate bonds   33,741    33,774    203    (170)   33,751    33,138    76    (689)
Total available for sale  $646,096    639,609    1,376    (7,863)   513,741    501,351    178    (12,568)
                                         
Securities held to maturity:                                        
  Mortgage-backed securities  $49,361    48,291        (1,070)   52,048    50,241        (1,807)
  State and local governments   41,542    41,989    465    (18)   49,189    49,665    525    (49)
Total held to maturity  $90,903    90,280    465    (1,088)   101,237    99,906    525    (1,856)

 

All of the Company’s mortgage-backed securities were issued by government-sponsored corporations, except for private mortgage-backed securities with a fair value of $1.0 million as of March 31, 2019 and December 31, 2018.

 

The following table presents information regarding securities with unrealized losses at March 31, 2019:

 

($ in thousands)  Securities in an Unrealized
Loss Position for
Less than 12 Months
   Securities in an Unrealized
Loss Position for
More than 12 Months
   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Government-sponsored enterprise securities  $        18,808    192    18,808    192 
Mortgage-backed securities   70,478    346    298,133    8,225    368,611    8,571 
Corporate bonds   2,480    60    9,049    110    11,529    170 
State and local governments           5,823    18    5,823    18 
      Total temporarily impaired securities  $72,958    406    331,813    8,545    404,771    8,951 

 

 

Page 13 

Index 

 

The following table presents information regarding securities with unrealized losses at December 31, 2018:

 

($ in thousands)  Securities in an Unrealized
Loss Position for
Less than 12 Months
   Securities in an Unrealized
Loss Position for
More than 12 Months
   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Government-sponsored enterprise securities  $4,921    78    13,682    318    18,603    396 
Mortgage-backed securities   82,525    351    294,305    12,939    376,830    13,290 
Corporate bonds   20,704    433    5,817    256    26,521    689 
State and local governments   595    1    6,641    48    7,236    49 
      Total temporarily impaired securities  $108,745    863    320,445    13,561    429,190    14,424 
                               

 

In the above tables, all of the securities that were in an unrealized loss position at March 31, 2019 and December 31, 2018 were bonds that the Company has determined are in a loss position due primarily to interest rate factors and not credit quality concerns. The Company evaluated the collectability of each of these bonds and concluded that there was no other-than-temporary impairment. The Company does not intend to sell these securities, and it is more likely than not that the Company will not be required to sell these securities before recovery of the amortized cost.

 

The book values and approximate fair values of investment securities at March 31, 2019, 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 
                 
Securities                    
Due within one year  $        865    868 
Due after one year but within five years   105,196    105,195    26,571    26,860 
Due after five years but within ten years   2,540    2,480    12,427    12,559 
Due after ten years   5,000    4,986    1,679    1,702 
Mortgage-backed securities   533,360    526,948    49,361    48,291 
Total securities  $646,096    639,609    90,903    90,280 

 

At March 31, 2019 and December 31, 2018 investment securities with carrying values of $245,711,000 and $284,382,000, respectively, were pledged as collateral for public deposits.

 

Included in “other assets” in the Consolidated Balance Sheets are cost-method investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”) stock totaling $37,776,000 and $37,468,000 at March 31, 2019 and December 31, 2018, respectively. The FHLB stock had a cost of $20,322,000 and $20,036,000 at March 31, 2019 and December 31, 2018, 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 of $17,454,000 and $17,432,000 at March 31, 2019 and December 31, 2018, respectively, and is a requirement for FRB member bank qualification. Periodically, both the FHLB and FRB recalculate the Company’s required level of holdings, and the Company either buys more stock or redeems a portion of the stock at cost. The Company determined that neither stock was impaired at either period end.

 

The Company owns 12,356 Class B shares of Visa, Inc. (“Visa”) stock that were received upon Visa’s initial public offering. These shares are expected to convert into Class A Visa shares subsequent to the settlement of certain litigation against Visa. The Class B shares have transfer restrictions, and the conversion rate into Class A shares is periodically adjusted as Visa settles litigation. The conversion rate at March 31, 2019 was approximately 1.63, which means the Company would receive approximately 20,140 Class A shares if the stock had converted on that date. This stock does not have a readily determinable fair value and is therefore carried at its cost basis of zero. If a readily determinable fair value becomes available for the Class B shares, or upon the conversion to Class A shares, the Company will adjust the carrying value of the stock to its market value with a credit to earnings.

 

Page 14 

Index 

Note 7 – Loans and Asset Quality Information

 

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

 

($ in thousands)  March 31, 2019   December 31, 2018   March 31, 2018 
   Amount   Percentage   Amount   Percentage   Amount   Percentage 
All  loans:                              
                               
Commercial, financial, and agricultural  $468,388    11%   $457,037    11%   $411,662    10% 
Real estate – construction, land development & other land loans   553,760    13%    518,976    12%    542,960    13% 
Real estate – mortgage – residential (1-4 family) first mortgages   1,061,049    25%    1,054,176    25%    995,662    24% 
Real estate – mortgage – home equity loans / lines of credit   354,669    8%    359,162    8%    373,797    9% 
Real estate – mortgage – commercial and other   1,794,794    42%    1,787,022    42%    1,718,698    42% 
Installment loans to individuals   69,503    1%    71,392    2%    71,257    2% 
    Subtotal   4,302,163    100%    4,247,765    100%    4,114,036    100% 
Unamortized net deferred loan costs (fees)   1,624         1,299         (251)     
    Total loans  $4,303,787        $4,249,064        $4,113,785      

 

At March 31, 2019 and December 31, 2018, there was a remaining unaccreted discount on the retained portion of sold SBA loans amounting to $6.2 million and $5.7 million, respectively. As of March 31, 2019 and December 31, 2018, there was a remaining accretable discount of $14.1 million and $15.0 million, respectively, related to purchased non-impaired loans. Both types of discounts are amortized as yield adjustments over the respective lives of the loans, so long as the loans perform.

 

The following table presents changes in the recorded investment of purchased credit impaired (“PCI”) loans.

 

($ in thousands)

 

 

 

PCI loans

  For the
Quarter Ended
March 31,
2019
   For the Year
Ended
December 31,
2018
    For the
Quarter Ended
March 31,
2018
 
Balance at beginning of period  $17,393    23,165      23,165  
Change due to payments received and accretion   (1,556)   (5,799)     (1,023 )
Change due to loan charge-offs   (8)   (10)      
Transfers to foreclosed real estate       (4)      
Other   38    41      5  
Balance at end of period  $15,867    17,393      22,147  

 

The following table presents changes in the accretable yield for PCI loans.

 

($ in thousands)

 

 

 

Accretable Yield for PCI loans

  For the
Quarter Ended
March 31,
2019
   For the Year
Ended
December 31,
2018
    For the
Quarter Ended
March 31,
2018
 
Balance at beginning of period  $4,750    4,688      4,688  
Accretion   (392)   (2,050)     (374 )
Reclassification from (to) nonaccretable difference   237    849      155  
Other, net   550    1,263      (73 )
Balance at end of period  $5,145    4,750      4,396  

 

During the first three months of 2019, the Company received $133,000 in payments that exceeded the carrying amount of the related PCI loans, of which $112,000 was recognized as loan discount accretion income and $21,000 was recorded as additional loan interest income. During the first three months of 2018, the Company received $68,000 in payments that exceeded the carrying amount of the related PCI loans, all of which was recognized as loan discount accretion income.

 

Page 15 

Index 

Nonperforming assets are defined as nonaccrual loans, troubled debt restructured (“TDR”) loans, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows.

 

($ in thousands)  March 31,
2019
   December 31,
2018
   March 31,
2018
 
             
Nonperforming assets               
Nonaccrual loans  $20,684    22,575    21,849 
TDRs- accruing   12,457    13,418    18,495 
Accruing loans > 90 days past due            
     Total nonperforming loans   33,141    35,993    40,344 
Foreclosed real estate   6,390    7,440    11,307 
Total nonperforming assets  $39,531    43,433    51,651 
                
       Purchased credit impaired loans not included above (1)  $15,867    17,393    22,147 

 

(1) In the March 3, 2017 acquisition of Carolina Bank, and the October 1, 2017 acquisition of Asheville Savings Bank, the Company acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from nonperforming loans, including $0.6 million, $0.6 million, and $0.5 million in PCI loans at March 31, 2019, December 31, 2018, and March 31, 2018, respectively, that were contractually past due 90 days or more.

 

At March 31, 2019 and December 31, 2018, the Company had $1.5 million and $0.7 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)  March 31,
2019
   December 31,
2018
 
Commercial, financial, and agricultural  $980    919 
Real estate – construction, land development & other land loans   1,677    2,265 
Real estate – mortgage – residential (1-4 family) first mortgages   9,958    10,115 
Real estate – mortgage – home equity loans / lines of credit   1,632    1,685 
Real estate – mortgage – commercial and other   6,280    7,452 
Installment loans to individuals   157    139 
  Total  $20,684    22,575 
           

 

The following table presents an analysis of the payment status of the Company’s loans as of March 31, 2019.

 

($ in thousands)  Accruing
30-59
Days Past
Due
   Accruing
60-89 Days
Past Due
   Accruing
90 Days or
More Past
Due
   Nonaccrual
Loans
   Accruing
Current
   Total Loans
Receivable
 
                         
Commercial, financial, and agricultural  $817    319        980    466,067    468,183 
Real estate – construction, land development & other land loans   369    93        1,677    551,446    553,585 
Real estate – mortgage – residential (1-4 family) first mortgages   6,480    485        9,958    1,038,072    1,054,995 
Real estate – mortgage – home equity loans / lines of credit   624            1,632    352,081    354,337 
Real estate – mortgage – commercial and other   438    275        6,280    1,778,884    1,785,877 
Installment loans to individuals   526    51        157    68,585    69,319 
Purchased credit impaired   340    389    551        14,587    15,867 
  Total  $9,594    1,612    551    20,684    4,269,722    4,302,163 
Unamortized net deferred loan costs                            1,624 
           Total loans                           $4,303,787 

 

Page 16 

Index 

The following table presents an analysis of the payment status of the Company’s loans as of December 31, 2018.

 

($ 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  $191    5        919    455,692    456,807 
Real estate – construction, land development & other land loans   849    212        2,265    515,472    518,798 
Real estate – mortgage – residential (1-4 family) first mortgages   14,178    1,369        10,115    1,022,261    1,047,923 
Real estate – mortgage – home equity loans / lines of credit   1,048    254        1,685    355,831    358,818 
Real estate – mortgage – commercial and other   709    520        7,452    1,768,205    1,776,886 
Installment loans to individuals   359    220        139    70,422    71,140 
Purchased credit impaired   990    138    583        15,682    17,393 
  Total  $18,324    2,718    583    22,575    4,203,565    4,247,765 
Unamortized net deferred loan costs                            1,299 
           Total loans                           $4,249,064 

 

 

The following table presents the activity in the allowance for loan losses for all loans for the three months ended March 31, 2019.

 

 

($ in thousands)

  Commercial,
Financial,
and
Agricultural
   Real Estate

Construction,
Land
Development
& Other Land
Loans
   Real Estate

Residential
(1-4 Family)
First
Mortgages
   Real Estate
– Mortgage
– Home
Equity
Lines of
Credit
   Real Estate
– Mortgage

Commercial
and Other
   Installment
Loans to
Individuals
   Unallo
-cated
   Total 
                     
As of and for the three months ended March 31, 2019
                                 
Beginning balance  $2,889    2,243    5,197    1,665    7,983    952    110    21,039 
Charge-offs   (246)   (264)   (30)   (80)   (836)   (281)       (1,737)
Recoveries   414    287    160    128    271    33        1,293 
Provisions   652    18    (817)   (339)   702    302    (18)   500 
Ending balance  $3,709    2,284    4,510    1,374    8,120    1,006    92    21,095 
                                         
Ending balances as of March 31, 2019: Allowance for loan losses
Individually evaluated for impairment  $857    28    858        312            2,055 
Collectively evaluated for impairment  $2,852    2,256    3,596    1,362    7,723    990    92    18,871 
Purchased credit impaired  $        56    12    85    16        169 
                                         
Loans receivable as of March 31, 2019:
Ending balance – total  $468,388    553,760    1,061,049    354,669    1,794,794    69,503        4,302,163 
Unamortized net deferred loan costs                                      1,624 
Total loans                                     $4,303,787 
                                         
Ending balances as of March 31, 2019: Loans
Individually evaluated for impairment  $1,044    797    10,891    21    8,396            21,149 
Collectively evaluated for impairment  $467,139    552,788    1,044,104    354,316    1,777,481    69,319        4,265,147 
Purchased credit impaired  $205    175    6,054    332    8,917    184        15,867 

 

Page 17 

Index 

The following table presents the activity in the allowance for loan losses for the year ended December 31, 2018.

 

 

 

($ in thousands)

  Commercial,
Financial,
and
Agricultural
   Real Estate

Construction,
Land
Development
& Other Land
Loans
   Real Estate

Residential
(1-4 Family)
First
Mortgages
   Real Estate
– Mortgage
– Home
Equity
Lines of
Credit
   Real Estate
– Mortgage

Commercial
and Other
   Installment
Loans to
Individuals
   Unallo
-cated
   Total 
                     
As of and for the year ended December 31, 2018
                                         
Beginning balance  $3,111    2,816    6,147    1,827    6,475    950    1,972    23,298 
Charge-offs   (2,128)   (158)   (1,734)   (711)   (1,459)   (781)       (6,971)
Recoveries   1,195    4,097    833    364    1,503    309        8,301 
Provisions   711    (4,512)   (49)   185    1,464    474    (1,862)   (3,589)
Ending balance  $2,889    2,243    5,197    1,665    7,983    952    110    21,039 
                                         
Ending balances as of December 31, 2018: Allowance for loan losses
Individually evaluated for impairment  $226    134    955    48    906            2,269 
Collectively evaluated for impairment  $2,661    2,109    4,143    1,608    7,070    941    110    18,642 
Purchased credit impaired  $2        99    9    7    11        128 
                                         
Loans receivable as of December 31, 2018:
Ending balance – total  $457,037    518,976    1,054,176    359,162    1,787,022    71,392        4,247,765 
Unamortized net deferred loan costs                                      1,299 
Total loans                                     $4,249,064 
                                         
Ending balances as of December 31, 2018: Loans
Individually evaluated for impairment  $696    1,345    12,391    296    9,525            24,253 
Collectively evaluated for impairment  $456,111    517,453    1,035,532    358,522    1,767,361    71,140        4,206,119 
Purchased credit impaired  $230    178    6,253    344    10,136    252        17,393 

Page 18 

Index 

The following table presents the activity in the allowance for loan losses for all loans for the three months ended March 31, 2018.

 

 

($ in thousands)

  Commercial,
Financial,
and
Agricultural
   Real Estate

Construction,
Land
Development,
& Other
Land Loans
   Real Estate

Residential
(1-4 Family)
First
Mortgages
   Real Estate
– Mortgage
– Home
Equity
Lines of
Credit
   Real Estate
– Mortgage

Commercial
and Other
   Installment
Loans to
Individuals
   Unallo
-cated
   Total 
                     
As of and for the three months ended March 31, 2018
Beginning balance  $3,111    2,816    6,147    1,827    6,475    950    1,972    23,298 
Charge-offs   (239)   (2)   (243)   (176)   (41)   (118)       (819)
Recoveries   499    3,046    145    153    582    53        4,478 
Provisions   (835)   (3,543)   (157)   462    (1,025)   (41)   1,480    (3,659)
Ending balance  $2,536    2,317    5,892    2,266    5,991    844    3,452    23,298 
                                         
Ending balances as of March 31, 2018:  Allowance for loan losses
Individually evaluated for impairment  $143    22    1,120        398            1,683 
Collectively evaluated for impairment  $2,391    2,295    4,598    2,225    5,581    844    3,452    21,386 
Purchased credit impaired  $2        174    41    12            229 
                                         
Loans receivable as of March 31, 2018:
Ending balance – total  $411,662    542,960    995,662    373,797    1,718,698    71,257        4,114,036 
Unamortized net deferred loan fees                                      (251)
Total loans                                     $4,113,785 
                                         
Ending balances as of March 31, 2018: Loans
Individually evaluated for impairment  $433    3,242    13,783    23    9,063            26,544 
Collectively evaluated for impairment  $410,816    539,317    973,550    373,501    1,697,319    70,842        4,065,345 
Purchased credit impaired  $413    401    8,329    273    12,316    415        22,147 

 

Page 19 

Index 

 

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of March 31, 2019.

 

 

($ in thousands)

  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
 
Impaired loans with no related allowance recorded:                    
                     
Commercial, financial, and agricultural  $28    29        169 
Real estate – mortgage – construction, land development & other land loans   458    782        472 
Real estate – mortgage – residential (1-4 family) first mortgages   4,789    5,112        4,708 
Real estate – mortgage –home equity loans / lines of credit   21    30        21 
Real estate – mortgage –commercial and other   4,016    4,808        3,745 
Installment loans to individuals                
Total impaired loans with no allowance  $9,312    10,761        9,115 
                     
                     
Impaired loans with an allowance recorded:                    
                     
Commercial, financial, and agricultural  $1,016    1,016    857    701 
Real estate – mortgage – construction, land development & other land loans   339    339    28    599 
Real estate – mortgage – residential (1-4 family) first mortgages   6,102    6,303    858    6,934 
Real estate – mortgage –home equity loans / lines of credit               137 
Real estate – mortgage –commercial and other   4,380    4,998    312    5,215 
Installment loans to individuals                
Total impaired loans with allowance  $11,837    12,655    2,055    13,586 

 

Interest income recorded on impaired loans during the three months ended March 31, 2019 was insignificant.

 

The following table presents loans individually evaluated for impairment by class of loans, excluding PCI loans, as of December 31, 2018.

 

 

($ in thousands)

  Recorded
Investment
   Unpaid
Principal
Balance
   Related
Allowance
   Average
Recorded
Investment
 
Impaired loans with no related allowance recorded:                    
                     
Commercial, financial, and agricultural  $310    310        957 
Real estate – mortgage – construction, land development & other land loans   485    803        2,366 
Real estate – mortgage – residential (1-4 family) first mortgages   4,626    4,948        4,804 
Real estate – mortgage –home equity loans / lines of credit   22    31        91 
Real estate – mortgage –commercial and other   3,475    4,237        3,670 
Installment loans to individuals                
Total impaired loans with no allowance  $8,918    10,329        11,888 
                     
Impaired loans with an allowance recorded:                    
                     
Commercial, financial, and agricultural  $386    387    226    422 
Real estate – mortgage – construction, land development & other land loans   860    864    134    385 
Real estate – mortgage – residential (1-4 family) first mortgages   7,765    7,904    955    8,963 
Real estate – mortgage –home equity loans / lines of credit   274    275    48    184 
Real estate – mortgage –commercial and other   6,050    6,054    906    5,911 
Installment loans to individuals               2 
Total impaired loans with allowance  $15,335    15,484    2,269    15,867 

 

Interest income recorded on impaired loans during the year ended December 31, 2018 was insignificant. Interest income recorded on impaired loans during the three months ended March 31, 2018 was insignificant.

 

Page 20 

Index 

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.  

 

Page 21 

Index 

The following table presents the Company’s recorded investment in loans by credit quality indicators as of March 31, 2019.

 

($ in thousands)    
   Pass   Special
Mention Loans
   Classified
Accruing Loans
   Classified
Nonaccrual
Loans
   Total 
                     
Commercial, financial, and agricultural  $460,963    4,667    1,573    980    468,183 
Real estate – construction, land development & other land loans   544,496    5,960    1,452    1,677    553,585 
Real estate – mortgage – residential (1-4 family) first mortgages   1,009,860    16,271    18,905    9,958    1,054,994 
Real estate – mortgage – home equity loans / lines of credit   345,187    1,466    6,052    1,632    354,337 
Real estate – mortgage – commercial and other   1,752,757    18,664    8,177    6,280    1,785,878 
Installment loans to individuals   68,606    227    329    157    69,319 
Purchased credit impaired   8,148    4,025    3,694        15,867 
  Total  $4,190,017    51,280    40,182    20,684    4,302,163 
Unamortized net deferred loan costs                       1,624 
            Total loans                       4,303,787 

 

The following table presents the Company’s recorded investment in loans by credit quality indicators as of December 31, 2018.

 

($ in thousands)    
   Pass   Special
Mention Loans
   Classified
Accruing Loans
   Classified
Nonaccrual
Loans
   Total 
                     
Commercial, financial, and agricultural  $452,372    3,056    459    919    456,806 
Real estate – construction, land development & other land loans   509,251    5,668    1,614    2,265    518,798 
Real estate – mortgage – residential (1-4 family) first mortgages   1,004,458    12,238    21,113    10,115    1,047,924 
Real estate – mortgage – home equity loans / lines of credit   348,792    1,688    6,653    1,685    358,818 
Real estate – mortgage – commercial and other   1,750,810    14,484    4,140    7,452    1,776,886 
Installment loans to individuals   70,357    231    413    139    71,140 
Purchased credit impaired   8,355    5,214    3,824        17,393 
  Total  $4,144,395    42,579    38,216    22,575    4,247,765 
Unamortized net deferred loan costs                       1,299 
            Total loans                       4,249,064 

 

 

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 are due 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.

Page 22 

Index 

The following table presents information related to loans modified in a troubled debt restructuring during the three months ended March 31, 2019 and 2018.

 

($ in thousands)  For three months ended
March 31, 2019
   For the three months ended
March 31, 2018
 
   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   1    55    55             
Real estate – mortgage – home equity loans / lines of credit                        
Real estate – mortgage – commercial and other                        
Installment loans to individuals                        
                               
TDRs – Nonaccrual                              
Commercial, financial, and agricultural                        
Real estate – construction, land development & other land loans               1    61    61 
Real estate – mortgage – residential (1-4 family) first mortgages               2    254    264 
Real estate – mortgage – home equity loans / lines of credit                        
Real estate – mortgage – commercial and other                        
Installment loans to individuals                        
Total TDRs arising during period   1   $55   $55    3   $315   $325 
                               

 

Accruing restructured loans that were modified in the previous 12 months and that defaulted during the three months ended March 31, 2019 and 2018 are presented in the table below. The Company considers a loan to have defaulted when it becomes 90 or more days delinquent under the modified terms, has been transferred to nonaccrual status, or has been transferred to foreclosed real estate.

 

($ in thousands)  For the three months ended
March 31, 2019
   For the three months ended
March 31, 2018
 
   Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 
                 
Accruing TDRs that subsequently defaulted                    
Real estate – mortgage – residential (1-4 family first mortgages)   1   $93       $ 
Real estate – mortgage – commercial and other           1    570 
                     
Total accruing TDRs that subsequently defaulted   1   $93    1   $570 

 

Page 23 

Index 

 

Note 8 – Goodwill and Other Intangible Assets

 

The following is a summary of the gross carrying amount and accumulated amortization of amortizable intangible assets as of March 31, 2019, December 31, 2018, and March 31, 2018 and the carrying amount of unamortized intangible assets as of those same dates.

 

   March 31, 2019   December 31, 2018   March 31, 2018 
($ in thousands)  Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
   Gross Carrying
Amount
   Accumulated
Amortization
 
Amortizable intangible assets:                              
   Customer lists  $6,013    1,774    6,013    1,637    6,013    1,185 
   Core deposit intangibles   28,440    17,585    28,440    16,469    28,440    12,803 
   SBA servicing asset   6,072    1,352    5,472    1,053    3,348    319 
   Other   1,303    1,036    1,303    957    1,303    718 
        Total  $41,828    21,747    41,228    20,116    39,104    15,025 
                               
Unamortizable intangible                              
    assets:                              
   Goodwill  $234,368         234,368         231,681      

 

The Company recorded $600,000 and $1,154,000 in servicing assets associated with the guaranteed portion of SBA loans originated and sold during the first quarters of 2019 and 2018, respectively. During the first quarters of 2019 and 2018, the Company recorded $299,000 and $112,000, respectively, in related amortization expense. Servicing assets are recorded for loans, or portions thereof, that the Company has sold but continue to service for a fee. Servicing assets are recorded at fair value and amortized over the expected lives of the related loans and are tested for impairment on a quarterly basis. SBA servicing asset amortization expense is recorded within noninterest income to offset SBA servicing fees.

 

Amortization expense of all other intangible assets totaled $1,332,000 and $1,560,000 for the three months ended March 31, 2019 and 2018, respectively.

 

The following table presents the estimated amortization expense related to amortizable intangible assets for the last three quarters of calendar year 2019 and for each of the four calendar years ending December 31, 2023 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
 
April 1 to December 31, 2019  $4,191 
2020   4,641 
2021   3,628 
2022   2,525 
2023   1,453 
Thereafter   3,643 
         Total  $20,081 

 

Page 24 

Index 

 

Note 9 – 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 periodic pension cost totaling $244,000 and $365,000 for the three months ended March 31, 2019 and 2018, respectively. The following table contains the components of the pension cost.

 

   For the Three Months Ended March 31, 
   2019   2018   2019   2018   2019 Total   2018 Total 
($ in thousands)  Pension Plan   Pension Plan   SERP   SERP   Both Plans   Both Plans 
Service cost  $            29        29 
Interest cost   372    330    41    57    413    387 
Expected return on plan assets   (397)   (103)           (397)   (103)
Amortization of net (gain)/loss   223    60    5    (8)   228    52 
   Net periodic pension cost   $198    287    46    78    244    365 

 

The service cost component of net periodic pension cost is included in salaries and benefits expense and all other components of net periodic pension cost are included in other noninterest expense.

 

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 Company did not contribute to the Pension Plan in the first quarter 2019 and does not expect to contribute to the Pension Plan in 2019.

 

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 10 – 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)

 

  March 31, 2019   December 31, 2018   March 31, 2018 
Unrealized gain (loss) on securities available for sale  $(6,487)   (12,390)   (9,501)
     Deferred tax asset (liability)   1,516    2,896    2,220 
Net unrealized gain (loss) on securities available for sale   (4,971)   (9,494)   (7,281)
                
Additional pension asset (liability)   (2,992)   (3,220)   (3,148)
     Deferred tax asset (liability)   699    753    736 
Net additional pension asset (liability)   (2,293)   (2,467)   (2,412)
                
Total accumulated other comprehensive income (loss)  $(7,264)   (11,961)   (9,693)

 

Page 25 

Index 

 

The following table discloses the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2019 (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, 2019  $(9,494)   (2,467)   (11,961)
     Other comprehensive income (loss) before reclassifications   4,523        4,523 
     Amounts reclassified from accumulated other comprehensive income       174    174 
Net current-period other comprehensive income (loss)   4,523    174    4,697
                
Ending balance at March 31, 2019  $(4,971)   (2,293)   (7,264)

 

The following table discloses the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2018 (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, 2018  $(1,694)   (2,452)   (4,146)
     Other comprehensive income (loss) before reclassifications   (5,587)       (5,587)
     Amounts reclassified from accumulated other comprehensive income       40    40 
Net current-period other comprehensive income (loss)   (5,587)   40    (5,547)
                
Ending balance at March 31, 2018  $(7,281)   (2,412)   (9,693)

 

 

Note 11 – 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.

 

Page 26 

Index 

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at March 31, 2019.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
March 31,
2019
   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant Other
Observable Inputs
(Level 2)
   Significant
Unobservable Inputs
(Level 3)
 
Recurring                    
     Securities available for sale:                    
        Government-sponsored enterprise securities  $78,887        78,887     
        Mortgage-backed securities   526,948        526,948     
        Corporate bonds   33,774        33,774     
          Total available for sale securities  $639,609        639,609     
                     
Nonrecurring                    
     Impaired loans  $10,820            10,820 
     Foreclosed real estate   6,390            6,390 

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring and nonrecurring basis at December 31, 2018.

 

($ in thousands)        
Description of Financial Instruments  Fair Value at
December 31,
2018
   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  $82,662        82,662     
Mortgage-backed securities   385,551        385,551     
Corporate bonds   33,138        33,138     
Total available for sale securities  $501,351        501,351     
                     
Nonrecurring                    
     Impaired loans  $13,071            13,071 
     Foreclosed real estate   7,440            7,440 

 

 

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.

 

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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 March 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
March 31,
2019
   Valuation
Technique
  Significant Unobservable
Inputs
  Range
of Significant
Unobservable
Input Values
Impaired loans  $10,820   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   6,390   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, 2018, the significant unobservable inputs used in the fair value measurements were as follows:

 

($ in thousands)       
Description  Fair Value at
December 31,
2018
   Valuation
Technique
  Significant Unobservable
Inputs
  Range
of Significant
Unobservable
Input Values
Impaired loans  $13,071   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   7,440   Appraised value; List or contract price  Discounts to reflect current market conditions 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 months ended March 31, 2019 or 2018.

 

For the three months ended March 31, 2019 and 2018, the increase (decrease) in the fair value of securities available for sale was $5,903,000 and ($7,290,000), respectively, which is included in other comprehensive income (net of tax benefit (expense) of ($1,380,000) and $1,703,000, respectively). Fair value measurement methods at March 31, 2019 and 2018 are consistent with those used in prior reporting periods.

 

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The carrying amounts and estimated fair values of financial instruments at March 31, 2019 and December 31, 2018 are as follows:

 

      March 31, 2019   December 31, 2018 

 

($ 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  $80,620    80,620    56,050    56,050 
Due from banks, interest-bearing  Level 1   366,187    366,187    406,848    406,848 
Securities available for sale  Level 2   639,609    639,609    501,351    501,351 
Securities held to maturity  Level 2   90,903    90,280    101,237    99,906 
Presold mortgages in process of settlement  Level 1   3,318    3,318    4,279    4,279 
Total loans, net of allowance  Level 3   4,282,692    4,228,688    4,228,025    4,181,139 
Accrued interest receivable  Level 1   16,516    16,516    16,004    16,004 
Bank-owned life insurance  Level 1   102,524    102,524    101,878    101,878 
SBA Servicing Asset  Level 3   4,720    4,990    4,419    4,617 
                        
Deposits  Level 2   4,797,238    4,792,368    4,659,339    4,653,522 
Borrowings  Level 2   406,125    401,064    406,609    402,556 
Accrued interest payable  Level 2   2,341    2,341    1,976    1,972 
                        

 

 

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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 12 – Revenue from Contracts with Customers

 

All of the Company’s revenues that are in the scope of the “Revenue from Contracts with Customers” accounting standard (“Topic 606”) are recognized within noninterest income. The following table presents the Company’s sources of noninterest income for the three months ended March 31, 2019 and 2018. Items outside the scope of Topic 606 are noted as such.

 

   For the Three Months Ended 
$ in thousands  March 31, 2019   March 31, 2018 
         
Noninterest Income          
  In-scope of Topic 606:          
     Service charges on deposit accounts:  $2,945    3,263 
     Other service charges, commissions, and fees:          
        Interchange income   3,551    3,061 
        Other service charges and fees   1,697    1,424 
     Commissions from sales of insurance and financial products:          
        Insurance income   1,368    1,414 
        Wealth management income   661    526 
     SBA consulting fees   1,263    1,141 
     Foreclosed property gains (losses), net   (245)   (288)
   Noninterest income (in-scope of Topic 606)   11,240    10,541 
   Noninterest income (out-of-scope of Topic 606)   3,335    5,288 
Total noninterest income  $14,575    15,829 
           

A description of the Company’s revenue streams accounted for under Topic 606 is detailed below.

 

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Overdraft fees are recognized at the point in time that the overdraft occurs. Maintenance and activity fees include account maintenance fees and transaction-based fees. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of the month, representing the period over which the Company satisfies the performance obligation. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Service charges on deposits are withdrawn from the customer’s account balance.

 

Other service charges, commissions, and fees: The Company earns interchange income on its customers’ debit and credit card usage and earns fees from other services utilized by its customers. Interchange income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, ATM surcharge fees, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

 

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Commissions from the sale of insurance and financial products: The Company earns commissions from the sale of insurance policies and wealth management products.

 

Insurance income generally consists of commissions from the sale of insurance policies and performance-based commissions from insurance companies. The Company recognizes commission income from the sale of insurance policies when it acts as an agent between the insurance company and the policyholder. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Performance-based commissions from insurance companies are recognized at a point in time as policies are sold.

 

Wealth Management Income primarily consists of commissions received on financial product sales, such as annuities. The Company’s performance obligation is generally satisfied upon the issuance of the financial product. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company also earns some fees from asset management, which is billed quarterly for services rendered in the most recent period.

 

SBA Consulting fees: The Company earns fees for its consulting services related to the origination of SBA loans. Fees are based on a percentage of the dollar amount of the originated loans and are recorded when the performance obligation has been satisfied, upon closing the loan.

 

Foreclosed property gains (losses), net: The Company records a gain or loss from the sale of foreclosed property when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of foreclosed property to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the foreclosed property asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

 

The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the determination of the amount and timing of revenue from the above-described contracts with customers.

 

Note 13 – Leases

 

Effective January 1, 2019, the Company adopted new accounting guidance regarding Leases (Topic 842). As of March 31, 2019, the Company leased eight branch offices for which the land and buildings are leased and nine branch offices for which the land is leased but the building is owned. The Company also leases one loan production office and office space for several operational departments. All of the Company’s leases have historically qualified as operating leases under prior accounting guidance, and therefore, were not previously recognized on the Company’s Consolidated Balance Sheets. The lease agreements have maturity dates ranging from January 2021 through May 2076, some of which include options for multiple five- and ten-year extensions. The weighted average remaining life of the lease term for these leases was 21.19 years as of March 31, 2019.

 

The discount rate that was determined for each lease was based on the Company’s incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The weighted average discount rate for leases was 3.42% as of March 31, 2019.

 

Total operating lease expense was $0.6 million for the three months ended March 31, 2019. The right-of-use assets, included in premises and equipment, and lease liabilities, included in other liabilities, were $18.9 million and $19.0 million as of March 31, 2019, respectively.

 

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Index 

 

Estimated lease payments for the Company’s operating leases with initial terms of one year or more as of March 31, 2019 were as follows.

 

($ in thousands)

 

  Estimated Amortization
Expense
 
April 1 to December 31, 2019  $2,206 
2020   2,175 
2021   1,986 
2022   1,699 
2023   1,607 
Thereafter   19,571 
Total estimated lease payments   29,244 
Less effect of discounting   (10,268)
Present value of estimated lease payments (lease liability)  $18,976 

 

 

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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 original loan agreement. A loan is specifically evaluated for an appropriate valuation allowance if the loan balance is above a prescribed evaluation threshold (which varies based on credit quality, accruing status, troubled debt restructured status, purchased credit impaired status, and type of collateral) and the loan is determined to be impaired. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

 

The second component of the allowance model is an estimate of losses for all loans not considered to be impaired loans (“general reserve loans”). General reserve loans are segregated into pools by loan type and risk grade and estimated loss percentages are assigned to each loan pool based on historical losses.  The historical loss percentages are then adjusted for any environmental factors used to reflect changes in the collectability of the portfolio not captured by historical data.

 

The reserves estimated for individually evaluated impaired loans are then added to the reserve estimated for general reserve loans. This becomes our “allocated allowance.” The allocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to absorb losses inherent in the portfolio is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded. Any remaining difference between the allocated allowance and the actual allowance for loan losses recorded on our books is our “unallocated allowance.”

 

Purchased loans are recorded at fair value at the acquisition date. Therefore, amounts deemed uncollectible at the acquisition date represent a discount to the loan value and become a part of the fair value calculation. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan and this accretion is referred to as “loan discount accretion.”

 

Within the purchased loan portfolio, loans are deemed purchased credit impaired at acquisition if the bank believes it will not be able to collect all contractual cash flows. Performing loans with an unamortized discount or premium that are not deemed purchased credit impaired are considered to be purchased performing loans. Purchased credit impaired loans are individually evaluated as impaired loans, as described above, while purchased performing loans are evaluated as general reserve loans. For purchased performing loan pools, any computed allowance that is in excess of remaining net discounts is a component of the allocated allowance.

 

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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 and 2017, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis. For SBA Complete, the consulting firm we acquired in 2016, the identifiable intangible asset related to the customer list was determined to have a life of approximately seven years, with amortization occurring on a straight-line basis.

 

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. We have three reporting units – 1) First Bank with $222.7 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill. If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.

 

In our October 31, 2018 goodwill impairment evaluation, we concluded that the goodwill for each of our reporting units 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.

 

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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.

 

FINANCIAL OVERVIEW

 

Net income available to common shareholders for the first quarter of 2019 was $22.3 million, or $0.75 per diluted common share, an increase of 7.1% in earnings per share from the $20.7 million, or $0.70 per diluted common share, recorded in the first quarter of 2018.

 

Net Interest Income and Net Interest Margin

 

Net interest income for the first quarter of 2019 was $53.4 million, a 5.7% increase from the $50.5 million recorded in the first quarter of 2018. The increase in net interest income was due to growth in interest-earning assets.

 

Our net interest margin (tax-equivalent net interest income divided by average earning assets) for the first quarter of 2019 was 4.06% compared to 4.17% for the first quarter of 2018. The decrease in the net interest margin realized in 2019 was primarily due to lower loan discount accretion, significant interest recoveries realized in the prior year, and interest bearing liability costs that have increased more than earning asset yields.

 

Provision for Loan Losses and Asset Quality

 

We recorded a provision for loan losses of $0.5 million in the first quarter of 2019 compared to a negative provision for loan losses of $3.7 million (reduction of the allowance for loan losses) in the first quarter of 2018. In the first quarter of 2018, we experienced net loan recoveries of $3.7 million, which drove the negative provision for the quarter. Our provision for loan losses has remained at a low level over the past several years as a result of strong asset quality, including low loan charge-offs.

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Noninterest Income

 

Total noninterest income was $14.6 million and $15.8 million for the three months ended March 31, 2019 and March 31, 2018, respectively, with the majority of the decrease relating to declines in gains on SBA loan sales.

 

Noninterest Expenses

 

Noninterest expenses amounted to $39.3 million in the first quarter of 2019 compared to $43.5 million recorded in the first quarter of 2018. Most categories of noninterest expense decreased in the first quarter 2019 compared to the first quarter of 2018 due to operating efficiencies realized subsequent to the March 2018 merger conversion of the Asheville Savings Bank operations into First Bank.

 

Income Taxes

 

Our effective tax rate for the first quarter of 2019 was 20.9% compared to 22.0% in the first quarter of 2018. The decline was due to a decrease in the North Carolina corporate income tax rate from 3.0% to 2.5%, as well as the impact of certain merger expenses recorded in 2018 that were not tax deductible.

 

Balance Sheet and Capital

 

Total assets at March 31, 2019 amounted to $6.1 billion, a 7.2% increase from a year earlier. Total loans at March 31, 2019 amounted to $4.3 billion, a 4.6% increase from a year earlier, and total deposits amounted to $4.8 billion at March 31, 2019, a 6.7% increase from a year earlier.

 

We experienced steady organic loan and deposit growth during the first quarter of 2019. Organic loan growth amounted to $54.7 million, or 5.2% annualized, and organic deposit growth amounted to $137.9 million, or 12.0% annualized. We have ongoing internal initiatives to enhance loan and deposit growth, including our continued expansion into higher growth markets such as Charlotte and Raleigh.

 

We remain well-capitalized by all regulatory standards, with an estimated Total Risk-Based Capital Ratio at March 31, 2019 of 14.21%, an increase from the 12.79% reported at March 31, 2018.

 

Impact of New Lease Accounting Standard

 

During the first quarter of 2019, we adopted new accounting guidance which required us to record all long-term leases on our balance sheet. With the adoption of this guidance, we recorded $19.5 million in right-to-use lease assets, which was recorded within premises and equipment, and $19.5 million in lease obligations, which was recorded in other liabilities. These additions had an insignificant impact on our capital ratios, and there was no impact to our earnings related to the adoption of this new standard.

 

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 March 31, 2019 amounted to $53.4 million, an increase of $2.9 million, or 5.7%, from the $50.5 million recorded in the first quarter of 2018. Net interest income on a tax-equivalent basis for the three month period ended March 31, 2019 amounted to $53.8 million, an increase of $2.9 million, or 5.7%, from the $50.9 million recorded in the first quarter of 2018. 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 loans and investments that may have existed during those periods.

 

   Three Months Ended March 31, 
($ in thousands)  2019   2018 
Net interest income, as reported  $53,361    50,507 
Tax-equivalent adjustment   424    356 
Net interest income, tax-equivalent  $53,785    50,863 

 

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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 months ended March 31, 2019, the higher net interest income compared to the same period of 2018 was due to growth in loans outstanding.

 

The following table presents an analysis of net interest income.

 

   For the Three Months Ended March 31, 
   2019   2018 
($ in thousands)  Average
Volume
   Average
Rate
   Interest
Earned
or Paid
   Average
Volume
   Average
Rate
   Interest
Earned
or Paid
 
Assets                              
Loans (1)  $4,280,272    5.11%   $53,960   $4,099,495    4.96%   $50,170 
Taxable securities   651,878    2.95%    4,737    410,586    2.55%    2,586 
Non-taxable securities   45,752    2.99%    337    52,945    2.91%    380 
Short-term investments, primarily overnight funds   394,864    2.77%    2,701    386,586    2.02%    1,925 
Total interest-earning assets   5,372,766    4.66%    61,735    4,949,612    4.51%    55,061 
                               
Cash and due from banks   55,899              93,185           
Premises and equipment   137,023              115,956           
Other assets   379,361              390,763           
   Total assets  $5,945,049             $5,549,516           
                               
Liabilities                              
Interest bearing checking  $908,039    0.15%   $327   $885,428    0.09%   $199 
Money market deposits   1,056,931    0.54%    1,395    1,005,588    0.23%    575 
Savings deposits   426,843    0.27%    287    448,785    0.19%    205 
Time deposits >$100,000   712,540    1.81%    3,178    599,727    1.00%    1,475 
Other time deposits   263,171    0.60%    390    282,678    0.31%    219 
     Total interest-bearing deposits   3,367,524    0.67%    5,577    3,222,206    0.34%    2,673 
Borrowings   406,190    2.79%    2,797    407,158    1.87%    1,881 
Total interest-bearing liabilities   3,773,714    0.90%    8,374    3,629,364    0.51%    4,554 
                               
Noninterest bearing checking   1,336,707              1,181,599           
Other liabilities   59,569              37,142           
Shareholders’ equity   775,059              701,411           
Total liabilities and
shareholders’ equity
  $5,945,049             $5,549,516           
                               
Net yield on interest-earning assets and net interest income        4.03%   $53,361         4.14%   $50,507 
Net yield on interest-earning assets and net interest income – tax-equivalent (2)        4.06%   $53,785         4.17%   $50,863 
                               
Interest rate spread        3.76%              4.00%      
                               
Average prime rate        5.50%              4.53%      
(1)  Average loans include nonaccruing loans, the effect of which is to lower the average rate shown.
(2)Includes tax-equivalent adjustments of $424,000 and $356,000 in 2019 and 2018, respectively, to reflect the tax benefit that we receive related to tax-exempt securities and tax-exempt loans, which carry interest rates lower than similar taxable investments/loans due to their tax exempt status. This amount has been computed assuming a 23% tax rate and is reduced by the related nondeductible portion of interest expense.

 

Average loans outstanding for the first quarter of 2019 were $4.280 billion, which was $181 million, or 4.4%, higher than the average loans outstanding for the first quarter of 2018 ($4.099 billion). The higher amount of average loans outstanding in 2019 was primarily due to our loan growth initiatives, including our continued focus and expansion into higher growth markets.

 

The mix of our loan portfolio remained substantially the same at March 31, 2019 compared to December 31, 2018, with approximately 88% of our loans being real estate loans, 11% being commercial, financial, and agricultural loans, and the remaining 1% 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.

 

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Average total deposits outstanding for the first quarter of 2019 were $4.704 billion, which was $300 million, or 6.8%, higher than the average deposits outstanding for the first quarter of 2018 ($4.404 billion). We continue to implement strategies to grow deposits, which we believe to be the principal reason for the increases in the past year. Average transaction deposit accounts (noninterest bearing checking, interest bearing checking, money market and savings accounts) increased from $3.521 billion at March 31, 2018 to $3.729 billion at March 31, 2019, representing growth of $207 million, or 5.9%. Average time deposits also increased from $882 million at March 31, 2018 to $976 million at March 31, 2019, an increase of $93 million, or 10.6%.

 

Average borrowings remained stable at approximately $406 million at March 31, 2019 and 2018. Our cost of funds, which includes noninterest bearing checking accounts at a zero percent cost, was 0.66% in the first quarter of 2019 compared to 0.38% in the first quarter of 2018.

 

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 first quarter of 2019 was 4.06% and was 4.17% for the first quarter of 2018. The decrease in the net interest margin realized in 2019 was primarily due to lower loan discount accretion, significant interest recoveries realized in the prior year and interest bearing liability costs that have increased more than earning asset yields, as discussed in the following paragraph.

 

We recorded loan discount accretion of $1.4 million in the first quarter of 2019, compared to $2.1 million in the first quarter of 2018. Loan discount accretion had an 11 basis point impact on the net interest margin in the first quarter of 2019 compared to an 18 basis point impact in the first quarter of 2018. The lower discount accretion in 2019 was attributable to paydowns in our acquired loan portfolios. Additionally, in the first quarter of 2018, we received approximately $750,000 in interest recoveries on loans that had been charged off in the past that added approximately 6 basis points to the net interest margin in the first quarter of 2018. Finally, over the past year, our interest bearing liability costs have increased more than earning asset yields, with the rate on interest bearing liabilities being 39 basis points higher in the first quarter of 2019 compared to the first quarter of 2018, while earning asset yields increased by approximately 27 basis points for that same period (exclusive of the impact of the loan discount accretion and interest recovery variances).

 

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

 

We recorded a provision for loan losses of $0.5 million for the first quarter of 2018 compared to a negative provision for loan losses (reduction of the allowance for loan losses) of $3.7 million in first quarter of 2018. In the first quarter of 2018, we experienced net loan recoveries of $3.7 million, which drove the negative provision for the quarter. Our provision for loan losses has remained at a low level over the past several years as a result of strong asset quality, including low loan charge-offs.

 

Our provision for loan loss levels have been impacted by continued improvement in asset quality. Nonperforming assets amounted to $39.5 million at March 31, 2019, a decrease of 23.5% from the $51.7 million one year earlier. Our nonperforming assets to total assets ratio was 0.65% at March 31, 2019 compared to 0.92% at March 31, 2018. Annualized net charge-offs (recoveries) as a percentage of average loans for the three months ended March 31, 2019 was 0.04% compared to (0.36%) for the same period of 2018.

 

Total noninterest income was $14.6 million in the first quarter of 2019 compared to $15.8 million for the first quarter of 2018, as presented in the following table:

 

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   For the Three Months Ended 
$ in thousands  March 31,
2019
   March 31,
2018
 
         
Service charges on deposit accounts  $2,945    3,263 
Other service charges, commissions, and fees   5,248    4,485 
Fees from presold mortgage loans   545    859 
Commissions from sales of insurance and financial products   2,029    1,940 
SBA consulting fees   1,263    1,141 
SBA loan sale gains   2,062    3,802 
Bank-owned life insurance income   646    623 
Foreclosed property gains (losses), net   (245)   (288)
Other gains (losses), net   82   4
          Noninterest income   14,575    15,829 
Non-GAAP adjustments          
          Add: Foreclosed property gains (losses), net   245   288
          Less: Other gains (losses), net    (82 )     (4 )
        Adjusted noninterest income   $ 14,738       16,113  

 

Management evaluates noninterest income on a basis that excludes items that can be volatile in nature, such as foreclosed property gains (losses), net. We consider this adjusted noninterest income. As presented in the table above, adjusted noninterest income for the first quarter of 2019 was $14.7 million, a decrease of 7.9% from the $16.1 million reported for the first quarter of 2018, which was primarily due to decreases in SBA loan sale gains recorded in 2019 (see additional discussion below). Adjusted 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.

 

As shown in the table above, service charges on deposit accounts decreased from $3.3 million in the first quarter of 2018 to $2.9 million in the first quarter of 2019. The decrease in 2019 was primarily due to fewer instances of fees earned from customers overdrawing their accounts.

 

Other service charges, commissions, and fees increased in the first quarter of 2019 compared to 2018, primarily as a result of higher debit card and credit card interchange fees associated with increased usage. We earn a small fee each time a customer uses a debit 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 continued promotion of this product

 

Fees from presold mortgages decreased from $0.9 million in the first quarter of 2018 to $0.5 million in the first quarter of 2019. Fees decreased in the first quarter of 2019 due to overall lower volumes in the mortgage industry and employee turnover within the mortgage department.

 

Commissions from sales of insurance and financial products amounted to approximately $2.0 million and $1.9 million for the first three months of 2019 and 2018, respectively. The increase in 2019 was primarily due to increases in commissions from the sales of our wealth management products.

 

During the three months ended March 31, 2019 and 2018, we realized $2.0 million and $3.8 million in gains on SBA loan sales, respectively. The decline in the first quarter of 2019 gains was a result of a combination of a lower sales volume and lower premiums realized.

 

Noninterest expenses amounted to $39.3 million in the first quarter of 2019 compared to $43.5 million recorded in the first quarter of 2018. Most categories of noninterest expense decreased in the first quarter 2019 compared to the first quarter of 2018 due to operating efficiencies realized subsequent to the March 2018 merger conversion of the Asheville Savings Bank operations into First Bank.

 

Salaries expense decreased to $19.0 million in the first quarter of 2019 from the $19.4 million in the first quarter of 2018, primarily due to a lower estimated payout for our annual incentive plan for the 2019 fiscal year. Employee benefits expense remained relatively unchanged and amounted to $4.6 million in each of the first quarters of 2019 and 2018.

 

The combined amount of occupancy and equipment expense remained stable at $4.1 million in each of the first quarters of 2019 and 2018.

 

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Merger and acquisition expenses amounted to $0.1 million for the three months ended March 31, 2019, compared to $2.8 million in the comparable period of 2018. The merger and acquisition expenses recorded in the first quarter of 2018 related to the Asheville Savings Bank acquisition.

 

Intangibles amortization expense amounted to $1.3 million in the first quarter of 2019 compared to $1.6 million in the first quarter of 2018.

 

Other operating expenses amounted to $10.2 million for the first quarter of 2019 compared to $11.1 million in the first quarter of 2018, with the decrease relating to numerous operational efficiencies gained after the March 2018 merger conversion of the operations of Asheville Savings Bank into First Bank.

 

For the first quarter of 2019, the provision for income taxes was $5.9 million, an effective tax rate of 20.9%. For the first quarter of 2018, the provision for income taxes was $5.8 million, an effective tax rate of 22.0%. The decline was due to a decrease in the North Carolina corporate income tax rate from 3.0% to 2.5%, as well as the impact of certain merger expenses recorded in 2018 that were not tax deductible.

 

The consolidated statements of comprehensive income reflect other comprehensive income of $4.7 million during the first quarter of 2019 compared other comprehensive loss of $5.5 million during the first quarter of 2018. 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.

 

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FINANCIAL CONDITION

 

Total assets at March 31, 2019 amounted to $6.1 billion, a 7.2% increase from a year earlier. Total loans at March 31, 2019 amounted to $4.3 billion, a 4.6% increase from a year earlier, and total deposits amounted to $4.8 billion, a 6.7% 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 March 31, 2019 and for the first quarter of 2019.

 

April 1, 2018 to
March 31, 2019
  Balance at
beginning
of period
   Internal
Growth,
net
   Balance at
end of
period
   Total
percentage
growth
 
        
        
Total loans  $4,113,785    190,002    4,303,787    4.6% 
                     
Deposits – Noninterest bearing checking   1,227,608    162,908    1,390,516    13.3% 
Deposits – Interest bearing checking   896,189    26,065    922,254    2.9% 
Deposits – Money market   1,026,043    52,959    1,079,002    5.2% 
Deposits – Savings   445,405    (27,593)   417,812    -6.2% 
Deposits – Brokered   251,043    (34,427)   216,616    -13.7% 
Deposits – Internet time   7,248    (3,820)   3,428    -52.7% 
Deposits – Time>$100,000   357,595    148,553    506,148    41.5% 
Deposits – Time<$100,000   284,577    (23,115)   261,462    -8.1% 
     Total deposits  $4,495,708    301,530    4,797,238    6.7% 
                     
January 1, 2019 to
March 31, 2019
                    
Total loans  $4,249,064    54,723    4,303,787    1.3% 
                     
Deposits – Noninterest bearing checking   1,320,131    70,385    1,390,516    5.3% 
Deposits – Interest bearing checking   916,374    5,880    922,254    0.6% 
Deposits – Money market   1,035,523    43,479    1,079,002    4.2% 
Deposits – Savings   432,389    (14,577)   417,812    -3.4% 
Deposits – Brokered   239,875    (23,259)   216,616    -9.7% 
Deposits – Internet time   3,428        3,428    0.0% 
Deposits – Time>$100,000   447,619    58,529    506,148    13.1% 
Deposits – Time<$100,000   264,000    (2,538)   261,462    -1.0% 
     Total deposits  $4,659,339    137,899    4,797,238    3.0% 
                     

 

As derived from the table above, for the twelve months preceding March 31, 2019, our total loans increased $190.0 million, or 4.6%. For the first three months of 2019, loan growth was $54.7 million, or 1.3%. Loan growth for both periods was organic and driven by our continued expansion into high-growth markets and our emphasis on SBA lending. We expect continued growth in our loan portfolio in 2019.

 

The mix of our loan portfolio remains substantially the same at March 31, 2019 compared to December 31, 2018. The majority of our real estate loans are personal and commercial loans where real estate provides additional security for the loan. Note 6 to the consolidated financial statements presents additional detailed information regarding our mix of loans.

 

For both the three and twelve month periods ended March 31, 2019, we experienced internal growth in our core deposit accounts (checking, money market and savings) and in our retail time deposits, excluding brokered and internet time deposits. We routinely engage in activities designed to grow and retain deposits, such as (1) emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with us, (2) pricing deposits at rate levels that will attract and/or retain deposits, and (3) continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services. Total brokered and internet time deposits declined in both periods due to the strong growth in our retail deposits.

 

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With our deposit growth exceeding our loan growth over the past twelve months, our liquidity levels have increased.  Our liquid assets (cash and securities) as a percentage of our total deposits and borrowings increased from 20.0% at March 31, 2018 to 22.6% at March 31, 2019. 

 

Over the past year, we have invested a portion of our cash balances into available for sale investment securities, primarily to achieve higher yields.  Total securities available for sale increased from $341.0 million at March 31, 2018 to $639.6 million at March 31, 2019, while total cash balance have declined from $526.7 million to $446.8 million over that same period.

 

Nonperforming Assets

 

Nonperforming assets include nonaccrual loans, TDRs, loans past due 90 or more days and still accruing interest, and foreclosed real estate. Nonperforming assets are summarized as follows:

 

 

 

ASSET QUALITY DATA ($ in thousands)

  As of/for the
quarter ended
March 31, 2019
   As of/for the
quarter ended
December 31, 2018
   As of/for the
quarter ended
March 31, 2018
 
             
Nonperforming assets               
   Nonaccrual loans  $20,684    22,575    21,849 
   TDRs – accruing   12,457    13,418    18,495 
   Accruing loans >90 days past due            
      Total nonperforming loans   33,141    35,993    40,344 
   Foreclosed real estate   6,390    7,440    11,307 
          Total nonperforming assets  $39,531    43,433    51,651 
                
Purchased credit impaired loans not included above (1)  $15,867    17,393    22,147 
                
Asset Quality Ratios – All Assets               
Net charge-offs to average loans - annualized   0.04%    0.02%    (0.36%)
Nonperforming loans to total loans   0.77%    0.85%    0.98% 
Nonperforming assets to total assets   0.65%    0.74%    0.92% 
Allowance for loan losses to total loans   0.49%    0.50%    0.57% 
Allowance for loan losses + unaccreted discount on acquired loans to total loans   0.86%    0.90%    1.11% 
Allowance for loan losses to nonperforming loans   63.65%    58.45%    57.75% 

 

(1)In the March 3, 2017 acquisition of Carolina Bank and the October 1, 2017 acquisition of Asheville Savings Bank, we acquired $19.3 million and $9.9 million, respectively, in PCI loans in accordance with ASC 310-30 accounting guidance. These loans are excluded from the nonperforming loan amounts, including $0.6 million, $0.6 million, and $0.5 million in PCI loans at March 31, 2019, December 31, 2018, and March 31, 2018, respectively, that were contractually past due 90 days or more.

 

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.

 

As noted in the table above, at March 31, 2019, total nonaccrual loans amounted to $20.7 million, compared to $22.6 million at December 31, 2018 and $21.8 million at March 31, 2018. Nonaccrual loans have generally declined in recent years as our local economies have improved, and we continue to focus on resolving our problem assets.

 

TDRs are accruing loans for which we have granted concessions to the borrower as a result of the borrower’s financial difficulties. At March 31, 2019, total accruing TDRs amounted to $12.5 million, compared to $13.4 million at December 31, 2018 and $18.5 million at March 31, 2018.

 

Foreclosed real estate includes primarily foreclosed properties. Total foreclosed real estate amounted to $6.4 million at March 31, 2019, $7.4 million at December 31, 2018, and $11.3 million at March 31, 2018. 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.

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The following is the composition, by loan type, of all of our nonaccrual loans at each period end

 

($ in thousands)  At March 31,
2019
   At December 31,
2018
   At March 31,
2018
 
Commercial, financial, and agricultural  $980    919    801 
Real estate – construction, land development, and other land loans   1,677    2,265    1,766 
Real estate – mortgage – residential (1-4 family) first mortgages   9,958    10,115    12,073 
Real estate – mortgage – home equity loans/lines of credit   1,632    1,685    1,980 
Real estate – mortgage – commercial and other   6,280    7,452    5,119 
Installment loans to individuals   157    139    110 
   Total nonaccrual loans  $20,684    22,575    21,849 

 

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 March 31, 2019   At December 31, 2018   At March 31, 2018 
Vacant land and farmland  $1,968    2,035    2,852 
1-4 family residential properties   1,526    2,311    3,710 
Commercial real estate   2,896    3,094    4,745 
   Total foreclosed real estate  $6,390    7,440    11,307 

 

The following table presents geographical information regarding our nonperforming assets at March 31, 2019.

 

  As of March 31, 2019 
($ in thousands)  Total
Nonperforming
Loans
   Total Loans   Nonperforming
Loans to Total
Loans
   Total
Foreclosed
Real Estate
 
                 
Region (1)                
Eastern Region (NC)  $8,487    916,000    0.93%   $1,973 
Triangle Region (NC)   7,722    914,000    0.84%    1,148 
Triad Region (NC)   5,521    867,000    0.64%    202 
Charlotte Region (NC)   1,223    334,000    0.37%    180 
Southern Piedmont Region (NC)   5,868    268,000    2.19%    743 
Western Region (NC)   1,137    684,000    0.17%    1,064 
South Carolina Region   1,186    161,000    0.74%    389 
Former Virginia Region   91    1,000    9.10%    691 
Other   1,906    159,000    1.20%     
      Total  $33,141    4,304,000    0.77%   $6,390 

 

(1)   The counties comprising each region are as follows:

Eastern North Carolina Region - New Hanover, Brunswick, Duplin, Dare, Beaufort, Pitt, Onslow, Carteret

Triangle North Carolina Region - Moore, Lee, Harnett, Chatham, Wake

Triad North Carolina Region - Montgomery, Randolph, Davidson, Rockingham, Guilford, Stanly, Forsyth, Alamance

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

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

Western North Carolina Region – Buncombe, Henderson, McDowell, Madison, Transylvania

South Carolina Region - Chesterfield, Dillon, Florence

Former Virginia Region - Wythe, Washington, Montgomery, Roanoke

Other includes loans originated on a national basis through the Company’s SBA Lending Division

 

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.

 

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The factors that influence management’s judgment in determining the amount charged to operating expense include recent loan loss experience, composition of the loan portfolio, evaluation of probable inherent losses and current economic conditions.

 

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)  Three Months
Ended
March 31,
   Twelve Months
Ended
December 31,
   Three Months
Ended
March 31,
 
   2019   2018   2018 
Loans outstanding at end of period  $4,303,787    4,249,064    4,113,785 
Average amount of loans outstanding  $4,280,272    4,161,838    4,099,495 
                
Allowance for loan losses, at beginning of year  $21,039    23,298    23,298 
Provision (reversal) for loan losses   500    (3,589)   (3,659)
    21,539    19,709    19,639 
Loans charged off:               
Commercial, financial, and agricultural   (246)   (2,128)   (239)
Real estate – construction, land development & other land loans   (264)   (158)   (2)
Real estate – mortgage – residential (1-4 family) first mortgages   (30)   (1,734)   (243)
Real estate – mortgage – home equity loans / lines of credit   (80)   (711)   (176)
Real estate – mortgage – commercial and other   (836)   (1,459)   (41)