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Acquisitions

12 Months Ended

Dec. 31, 2019

Since January 1, 2017, the Company completed the acquisitions described below. The results of each acquired company are included in the Company’s results beginning on its respective acquisition date.


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

Carolina Bank’s subsidiary bank was a North Carolina state-chartered bank with eight branches located in the North Carolina cities of Greensboro, High Point, Burlington, Winston-Salem, and Asheboro, and mortgage offices in Burlington, Hillsborough, and Sanford. The acquisition complemented the Company’s expansion into several of these high-growth markets and increased its market share in others with facilities, operations and experienced staff already in place. The Company was willing to record goodwill primarily due to the reasons just noted, as well as the positive earnings of Carolina Bank. The total merger consideration consisted of $25.3 million in cash and 3,799,471 shares of the Company’s common stock, with each share of Carolina Bank common stock being exchanged for either $20.00 in cash or 1.002 shares of the Company’s stock, subject to the total consideration being 75% stock / 25% cash. The issuance of

common stock was valued at $114.5 million and was based on the Company’s closing stock price on March 3, 2017 of $30.13 per share.

This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Carolina Bank were recorded based on estimates of fair values as of March 3, 2017. The Company was able to change its valuations of acquired Carolina Bank assets and liabilities for up to one year after the acquisition date by recording measurement period adjustments. The table below is a condensed balance sheet disclosing the amount assigned to each major asset and liability category of Carolina Bank on March 3, 2017, and the related fair value adjustments recorded by the Company to reflect the acquisition. The $66.5 million in goodwill that resulted from this transaction is non-deductible for tax purposes.



($ in thousands)	As Recorded by Carolina Bank			Initial Fair Value Adjustments				Measurement Period Adjustments			As Recorded by First Bancorp
Assets
Cash and cash equivalents	$	81,466		(2		)	(a)	—			81,464
Securities	49,629			(261		)	(b)	—			49,368
Loans, gross	505,560			(5,469		)	(c)	146		(l)	497,522
				(2,715		)	(d)	—
Allowance for loan losses	(5,746		)	5,746			(e)	—			—
Premises and equipment	17,967			4,251			(f)	(319	)	(m)	21,899
Core deposit intangible	—			8,790			(g)	—			8,790
Other	34,976			(4,804		)	(h)	757		(n)	30,929
Total	683,852			5,536				584			689,972

Liabilities
Deposits	$	584,950		431			(i)	—			585,381
Borrowings	21,855			(2,855		)	(j)	(262	)	(o)	18,738
Other	12,855			225			(k)	(444	)	(p)	12,636
Total	619,660			(2,199		)		(706	)		616,755

Net identifiable assets acquired											73,217

Total cost of acquisition
Value of stock issued				$	114,478
Cash paid in the acquisition				25,279
Total cost of acquisition											139,757

Goodwill recorded related to acquisition of Carolina Bank											$	66,540

Explanation of Fair Value Adjustments


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


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


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


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


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


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


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


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


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


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


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


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


(m)	This fair value adjustment relates to miscellaneous adjustment to decrease the initial fair value of premises and equipment.


(n)	This fair value adjustment relates to changes in the estimate of deferred tax assets/liabilities associated with the acquisition and a miscellaneous adjustment to decrease the initial fair value of foreclosed real estate acquired in the transaction based on newly obtained valuations.


(o)	This fair value adjustment relates to miscellaneous adjustments to decrease the initial fair value of borrowings.


(p)	This fair value adjustment related to a change in the estimate of a contingent liability.

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



($ in thousands, except share data)	Pro Forma Combined Year Ended December 31, 2017
Net interest income	$	168,759
Noninterest income	50,098
Total revenue	218,857

Net income available to common shareholders	49,907

Earnings per common share
Basic	$	1.93
Diluted	1.92

For purposes of the supplemental pro forma information, merger-related expenses of $5.2 million that were recorded in the Company’s consolidated statements of income for the year ended December 31, 2017 and $4.6 million of merger-related expenses that were recorded by Carolina Bank in 2017 prior to the merger date are each excluded above in the pro forma presentation for 2017.

(2) On September 1, 2017, First Bank Insurance completed the acquisition of Bear Insurance Service (“Bear Insurance”). The results of Bear Insurance are included the Company’s results beginning on the September 1, 2017 acquisition date.

Bear Insurance, an insurance agency based in Albemarle, North Carolina, with four locations in Stanly, Cabarrus, and Montgomery counties and annual commission income of approximately $4 million, and represented an opportunity to complement the Company’s insurance agency operations in these markets and the surrounding areas. Also, this acquisition provided the Company with a larger platform for leveraging insurance services throughout the Company’s bank branch network. The transaction value was $9.8 million, with the Company paying $7.9 million in cash and issuing 13,374 shares of its common stock, which had a value of approximately $0.4 million. Per the terms of the acquisition agreement, the Company also recorded an earn-out liability initially valued at $1.2 million, which will be paid as a cash distribution after a four-year period if pre-determined goals are met for the periods.

This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Bear Insurance were recorded based on estimates of fair values as of September 1, 2017. In connection with this transaction, the Company recorded $5.3 million in goodwill, which is deductible for tax purposes, and $3.9 million in other amortizable intangible assets, which are also deductible for tax purposes.

(3) On October 1, 2017, the Company completed the acquisition of ASB Bancorp, Inc. (“Asheville Savings Bank”), headquartered in Asheville, North Carolina, pursuant to an Agreement and Plan of Merger and Reorganization dated May 1, 2017. The results of Asheville Savings Bank are included in First Bancorp’s results beginning on the October 1, 2017 acquisition date.

Asheville Savings Bank’s subsidiary bank was a North Carolina state-chartered savings bank with eight branches located in Buncombe County, North Carolina and five branches located in the counties of Henderson, Madison, McDowell and Transylvania, all in North Carolina. The acquisition complemented the Company’s existing presence in the Asheville and surrounding markets, which are high-growth and highly desired markets. The Company was willing to record goodwill primarily due to the reasons just noted, as well as the positive earnings of Asheville Savings Bank. The total merger consideration consisted of $17.9 million in cash and 4,920,061 shares of the Company’s common stock, with each share of Asheville Savings Bank common stock being exchanged for either $41.90 in cash or 1.44 shares of the Company’s stock, subject to the total consideration being 90% stock / 10% cash. The issuance of common stock was valued at $169.3 million and was based on the Company’s closing stock price on September 30, 2017 of $34.41 per share.

This acquisition was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Asheville Savings Bank were recorded based on estimates of fair values as of October 1, 2017. The Company was able to change its valuations of acquired Asheville Savings Bank assets and liabilities for up to one year after the acquisition date by recording measurement period adjustments. The table below is a condensed balance sheet disclosing the amount assigned to each major asset and liability category of Asheville Savings Bank on October 1, 2017, and the related fair value adjustments recorded by the Company to reflect the acquisition. The $88.7 million in goodwill that resulted from this transaction is non-deductible for tax purposes.



($ in thousands)	As Recorded by Asheville Savings Bank			Initial Fair Value Adjustments				Measurement Period Adjustments			As Recorded by First Bancorp
Assets
Cash and cash equivalents	$	41,824		—				—			41,824
Securities	95,020			—				—			95,020
Loans, gross	617,159			(9,631		)	(a)	—			606,180
				(1,348		)	(b)	—
Allowance for loan losses	(6,685		)	6,685			(c)	—			—
Presold mortgages	3,785			—				—			3,785
Premises and equipment	10,697			9,857			(d)	—			20,554
Core deposit intangible	—			9,760			(e)	120		(i)	9,880
Other	35,944			(5,851		)	(f)	(777	)	(j)	29,316
Total	797,744			9,472				(657	)		806,559

Liabilities
Deposits	$	678,707		430			(g)	—			679,137
Borrowings	20,000			—				—			20,000
Other	8,943			298			(h)	(380	)	(k)	8,861
Total	707,650			728				(380	)		707,998

Net identifiable assets acquired											98,561

Total cost of acquisition
Value of stock issued				$	169,299
Cash paid in the acquisition				17,939
Total cost of acquisition											187,238

Goodwill recorded related to acquisition of Asheville Savings Bank											$	88,677

Explanation of Fair Value Adjustments


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


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


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


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


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


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


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


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


(i)	This fair value adjustment relates to a change in the final amount of the core deposit intangible asset from the amount originally estimated.


(j)	This fair value adjustment relates to the write-down of a foreclosed property based on an updated appraisal and the related tax deferred tax asset adjustment.


(k)	This fair value adjustment was recorded to adjust the tax liability assumed on the acquisition date based on updated information.

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



($ in thousands, except share data)	Pro Forma Combined Twelve Months Ended December 31, 2017
Net interest income	$	183,996
Noninterest income	54,523
Total revenue	238,519

Net income available to common shareholders	51,600

Earnings per common share
Basic	$	1.79
Diluted	1.78

For purposes of the supplemental pro forma information, merger-related expenses of $2.7 million that were recorded in the Company’s consolidated statements of income for the twelve months ended December 31, 2017 and $20.4 million of merger-related expenses that were recorded by Asheville Savings Bank in 2017 prior to the merger date are each excluded above in the pro forma presentation for 2017.