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Item 1A. Risk Factors

2022-03-01 compared with 2021-02-26 · 118 added, 141 removed, 146 unchanged (64% of the section changed)

An investment in our common stock involves certain risks.

Before you invest in our common stock, you should be aware that there are various risks, including those described below, which could affect the value of your investment in the future.

The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.

The risk factors described in this section, as well as any cautionary language in this report, provide examples of risks, uncertainties and events that could have a material adverse effect on our business, including our operating results and financial condition.

In addition to other information contained in this Annual Report that may affect us, the risk factors described below, as well as any cautionary language in this Report, provide examples of risks, uncertainties, and events that could have a material adverse effect on our business, including our operating results and financial condition.

In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially or adversely affect our business, financial condition, and results of operations.

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Risks Related to Our Business

The COVID-19 pandemic has impacted the local economies in the communities we serve and our business, and the extent and severity of the impact on our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted.

The COVID-19 pandemic has negatively impacted the local, national, and global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels.

The COVID-19 (including variants of the virus) pandemic has impacted the local economies in the communities we serve and our business.

The COVID-19 pandemic has negatively impacted the local, national, and global economies, disrupted global supply chains, increased unemployment, and created significant volatility and disruption in financial markets.

The duration of the COVID-19 pandemic and its effects cannot be determined with certainty, but the effects could be present for an extended period of time.

Since the onset of the pandemic, the majority of state and local jurisdictions have imposed, and others in the future may impose, varying levels of restrictions, including “shelter-in-place” orders, quarantines, executive orders and similar government orders to control the spread of COVID-19.

The COVID-19 pandemic and the institution of social distancing and sheltering-in-place requirements resulted in temporary closures of, or operating restrictions, on many businesses.

While many of the closed businesses reopened at varying levels of capacity, a resurgence of the pandemic may result in future restrictions or closures.

Since the onset of the pandemic, and as needed for spikes in infection rates, the majority of state and local jurisdictions have imposed, and others in the future may impose, varying levels of restrictions, including “shelter-in-place” orders, quarantines, executive orders and similar government orders to control the spread of COVID-19 and its variants.

At its height, the COVID-19 pandemic and the institution of social distancing and sheltering-in-place requirements resulted in temporary closures of, or operating restrictions, on many businesses.

While many of the closed businesses have reopened at varying levels of capacity, the occurrence of variants of the COVID-19 virus may result in future restrictions or closures.

As a result, the demand for our products and services may be significantly impacted.

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Our operations may also be disrupted if significant portions of our workforce are unable to work effectively, including due to illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic.

The extent to which the COVID-19 pandemic has a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

The economies of our market areas generally improved during 2021 as they recovered from the pandemic.

However, the ongoing impact on the Company of the continuing pandemic, including infection rate spikes and new strains of COVID-19, is uncertain.

The extent to which the COVID-19 virus and its variants have a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

Unfavorable economic conditions could adversely affect our business.

Our business is subject to periodic fluctuations based on national, regional, and local economic conditions.

These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on our operations

and financial condition.

These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on our operations and financial condition.

Our banking operations are primarily locally oriented and community-based.

Our retail and commercial banking activities are primarily concentrated within the same geographic footprint.

Our markets include most of North Carolina and northeastern South Carolina.

Worsening economic conditions within our markets could have a material adverse effect on our financial condition, results of operations, and cash flows.

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While economic growth and business activity has been generally favorable in our market area in recent years, there can be no assurance that economic conditions will persist, and these conditions could worsen.

In addition, unfavorable global economic conditions, including the 2020 outbreak of COVID-19, have had a negative impact on financial markets and could adversely impact our customers, which in turn could lead to lower business activity and higher loan delinquencies.

Unfavorable global economic conditions may have a negative impact on financial markets and could adversely impact our customers, which in turn could lead to lower business activity and higher loan delinquencies.

Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including continuing hostilities between Russia and Ukraine, terrorism or other geopolitical events.

Weakness in any of our market areas could have an adverse impact on our earnings, and consequently our financial condition and capital adequacy.

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The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.

Our allowance for loan losses may not be adequate to cover actual losses;

under CECL we may need to materially increase our allowance for loan losses and our provisions for credit losses may increase significantly and the provisions for credit losses may be more volatile than in the past.

Like all financial institutions, we maintain an allowance for loan losses to provide for probable losses caused by customer loan defaults.

The allowance for loan losses may not be adequate to cover actual loan losses, and in this case additional and larger provisions for loan losses would be required to replenish the allowance.

Our allowance for credit losses may not be adequate to cover actual losses;

under CECL our provisions for credit losses may increase significantly and the provisions for credit losses may be more volatile than in the past.

Like all financial institutions, we maintain an allowance for credit losses to provide for expected losses caused by customer loan defaults.

The ACL may not be adequate to cover actual loan losses, and in this case additional and larger provisions for loan losses would be required to replenish the allowance.

Provisions for loan losses are a direct charge against income.

We establish the amount of the allowance for loan losses based on historical loss rates, as well as estimates and assumptions about the ultimate amount of incurred losses that will be realized.

Because of the extensive use of estimates and assumptions, our actual loan losses could differ, possibly significantly, from our estimate.

We believe that our allowance for loan losses at December 31, 2020 is adequate to provide for probable losses, but it is possible that the allowance for loan losses will need to be increased for credit reasons or that regulators will require us to increase this allowance.

Either of these occurrences could materially and adversely affect our earnings and profitability.

In addition, the measure of our allowance for loan losses is dependent on the adoption of new accounting standards.

The FASB issued an Accounting Standards Update related to CECL, the new credit impairment model, which we expect to adopt as of January 1, 2021.

This new model requires financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for probable incurred losses up to the balance sheet date.

Under the CECL model, credit deterioration will be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.

We adopted CECL as of January 1, 2021.

Under the CECL model, credit deterioration is reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.

The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics, and quality of the Company's loan portfolio, as well as the prevailing economic conditions and forecasts.

The Company will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.

At this time, as a

result of the adoption, the Company expects its allowance for credit losses will increase by approximately $12-$14 million and that its reserve for unfunded commitments will increase by $6-$7 million.

We establish the amount of the ACL based on our current estimate of credit losses for the remaining estimated lives of loans in our portfolio.

Because of the extensive use of estimates and assumptions, our actual loan losses could differ, possibly significantly, from our estimate.

We believe that our ACL at December 31, 2021 is adequate to provide for expected losses, but it is possible that the ACL will need to be increased for changes in economic forecasts, credit deterioration, or that regulators will require us to increase this allowance.

An increase in the ACL could materially and adversely affect our earnings and profitability.

The CECL standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses.

Providing for losses over the life of our loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred.

This change may require us to increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses.

It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.

It also may result in small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.

We are subject to extensive regulation, which could have an adverse effect on our operations.

We are subject to extensive regulation and supervision from the Commissioner and the Federal Reserve.

This regulation and supervision is intended primarily to enhance the safe and sound operation of the Bank and for the protection of the FDIC insurance fund and our depositors and borrowers, rather than for holders of our equity securities.

In the past, our business has been materially affected by these regulations.

This trend is likely to continue in the future.

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets and the determination of the level of allowance for loan losses.

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets, and the determination of the level of allowance for credit losses.

Changes in the regulations that apply to us, or changes in our compliance with regulations, could have a material impact on our operations.

We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations and related enforcement actions.

The federal BSA, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate.

The FINCEN, established by the Treasury to administer the BSA, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S.

Various federal banking laws and regulations imposed heightened requirements on certain large banks and bank holding companies with at least $50 billion in total consolidated assets, but certain of these requirements also apply to banks and bank holding companies with at least $10 billion in total consolidated assets.

The Company and the Bank exceeded this $10 billion threshold as of December 31, 2021.

Among the consequences of the circumstance are the following:

• the Bank will calculate its FDIC deposit using a “score card” system using forward-looking measures intended to assess the risk to the DIF;

• under the Federal Reserve’s rules pursuant to the Durbin Amendment, the Bank is no longer exempt from the Federal Reserve interchange fee maximum and may charge a fee only up to the maximum level determined by the Federal Reserve to be reasonable and proportionate;

• the Bank will be subject to a continuous supervision model in addition to an annual safety and soundness examination;

• the Bank will be examined primarily by the CFPB for compliance with federal consumer protection laws.

We face a risk of noncompliance with the BSA and other AML statutes and regulations and related enforcement actions.

The BSA, the Patriot Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate.

Department of Justice, Drug Enforcement Administration, and Internal Revenue Service.

There is also increased scrutiny of compliance with the rules enforced by the OFAC.

Federal and state bank regulators also have begun to focus on compliance with BSA and AML regulations.

Federal and state bank regulators also focus on compliance with BSA and AML regulations.

If our policies, procedures, and systems are deemed deficient or the policies, procedures, and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition, and results of operations.

Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

Failure to maintain and implement adequate programs to combat money laundering and terrorist financing also could have serious reputational consequences for us.

Consumers may decide not to use banks to complete their financial transactions.

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Reputation risk, or the risk to our business, earnings, and capital from negative public opinion regarding our Company and the financial services industry in general, is inherent in our business.

Negative public opinion can result from actual or alleged conduct in any number of activities, including lending practices, corporate governance

and acquisitions, and from actions taken by government regulators and community organizations in response to those activities.

Negative public opinion can result from actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities.

Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action.

Although we have taken steps to minimize reputation risk in dealing with our clients and communities, this risk will always be present given the nature of our business.

We may make future acquisitions, which could dilute current shareholders’ stock ownership and expose us to additional risks.

In accordance with our strategic plan, we evaluate opportunities to acquire other banks, branch locations and companies that provide products and services related to our banking activities to expand the Company.

As a result, we may engage in acquisitions and other transactions that could have a material effect on our operating results and financial condition, including short and long-term liquidity.

Our acquisition activities could require us to issue a significant number of shares of common stock or other securities and/or to use a substantial amount of cash, other liquid assets, and/or incur debt.

In addition, if goodwill recorded in connection with our potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized.

Our acquisition activities could involve a number of additional risks, some of which are described in more detail elsewhere in this report and include:

• the possibility that expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve;

• incurring the time and expense associated with identifying and evaluating potential acquisitions and merger partners and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business;

• using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;

• incurring the time and expense required to integrate the operations and personnel of the combined businesses;

• the possibility that we will be unable to successfully implement integration strategies, due to challenges associated with integrating complex systems, technology, banking centers, and other assets of the acquired bank in a manner that minimizes any adverse effect on customers, suppliers, employees, and other constituencies;

• the possibility of regulatory approval for the acquisition being delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues surrounding the Company, the target institution or the proposed combined entity as a result of, among other things, issues related to AML and BSA compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, or CRA requirements, and the possibility that any such issues associated with the target institution, which we may or may not be aware of at the time of the acquisition, could impact the combined entity after completion of the acquisition;

• the possibility that the acquisition may not be timely completed, if at all;

• creating an adverse short-term effect on our results of operations;

• losing key employees and customers as a result of an acquisition that is poorly received.

If we do not successfully manage these risks, our acquisition activities could have a material adverse effect on our operating results and financial condition, including short- and long-term liquidity.

Although we have taken steps to minimize reputation risk in dealing with our clients and communities, this risk always will be present given the nature of our business.

The soundness of other financial institutions could adversely affect us.

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Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships.

We have exposure to many different industries and counterparties, and

we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and investment banks.

We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and investment banks.

Defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.

We can make no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.

We are subject to interest rate risk, which could negatively impact earnings.

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In the normal course of business, we process large volumes of transactions involving millions of dollars.

If our internal controls fail to work as expected, if our systems are used in an unauthorized manner, or if our employees subvert our internal controls, we could experience significant losses.

We process large volumes of transactions on a daily basis involving millions of dollars and are exposed to numerous types of operational risk.

Operational risk includes the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems and breaches of the internal control system and compliance requirements.

If our internal controls fail to work as expected, we could experience significant losses.

We process large volumes of transactions on a daily basis involving millions of dollars and are exposed to numerous types of operational risk, including the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements.

This risk also includes potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards.

We establish and maintain systems of internal operational controls that provide us with timely and accurate information about our level of operational risk.

Although not foolproof, these systems have been designed to manage operational risk at appropriate, cost-effective levels.

These systems have been designed to manage operational risk at appropriate, cost-effective levels.

Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed.

From time to time, losses from operational risk may occur, including the effects of operational errors.

We continually monitor and improve our internal controls, data processing systems, and corporate-wide processes and procedures, but there can be no assurance that future losses will not occur.

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Borrowings also provide us with a source of funds to meet liquidity demands.

An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity.

An inability to raise funds through from these or other sources could have a substantial negative effect on our liquidity.

Our access to funding sources in amounts adequate to finance our activities, or on terms which are acceptable to us, could be impaired by factors that affect us specifically or the financial services industry or economy in general.

Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated.

Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us

or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated.

Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations or deterioration in credit markets.

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We have goodwill recorded on our balance sheet as an asset with a carrying value as of December 31, 2021 of $364.3 million.

Under generally accepted accounting principles, goodwill is required to be tested for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount - see Note 6 to the consolidated financial statements for discussion of interim testing during 2020 that we performed.

The test for goodwill impairment

involves comparing the fair value of a company’s reporting units to their respective carrying values.

We have three reporting units – 1) First Bank with $227.6 million in goodwill, 2) First Bank Insurance with $7.4 million in goodwill, and 3) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill.

The price of our common stock is one of several factors available for estimating the fair value of our reporting units and is most closely associated with our First Bank reporting unit.

Under GAAP, goodwill is required to be tested for impairment at least annually and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The test for goodwill impairment involves comparing the fair value of a company’s reporting units to their respective carrying values.

We have two reporting units – 1) the Bank with $360.0 million in goodwill (including goodwill at the holding company level), and 2) SBA activities, including SBA Complete and our SBA Lending Division, with $4.3 million in goodwill.

The price of our common stock is one of several factors available for estimating the fair value of our reporting units and is most closely associated with our Bank reporting unit.

Subject to the results of other valuation techniques, if the price of our common stock falls below book value, it could indicate that a portion of our goodwill is impaired.

Accordingly, for this reason or other reasons that indicate that the goodwill at any of our reporting units is impaired, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined, which could have a negative impact on our results of operations.

For this reason or other reasons that indicate that the goodwill at any of our reporting units is impaired, we could be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill is determined, which could have a negative impact on our results of operations.

We might be required to raise additional capital in the future, but that capital may not be available or may not be available on terms acceptable to us when it is needed.

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If we cannot raise additional capital when needed, our ability to conduct our business could be materially impaired.

We may issue additional shares of stock or equity derivative securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.

Our authorized capital includes 40,000,000 shares of common stock and 5,000,000 shares of preferred stock.

As of December 31, 2020, we had 28,579,335 shares of common stock outstanding.

In addition, as of December 31, 2020, we had the ability to issue 549,876 shares of common stock pursuant to options and restricted stock under our existing equity compensation plan.

Subject to applicable NASDAQ rules, our board generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose.

Such corporate purposes could include, among other things, issuances of equity-based incentives under or outside of our equity compensation plans, issuances of equity in business combination transactions, and issuances of equity to raise additional capital to support growth or to otherwise strengthen our balance sheet.

Any issuance of additional shares of stock or equity derivative securities will dilute the percentage ownership interest of our shareholders and may dilute the book value per share of our common stock.

Shares we issue in connection with any such offering will increase the total number of outstanding shares and may dilute the economic and voting ownership interest of our existing shareholders.

We may be adversely impacted by the transition from LIBOR as a reference rate.

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”).

This announcement indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.

Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR.

Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR and that from January 1, 2022, publications of most LIBOR rates would end.

As of this date, LIBOR cannot be used as a reference for new loan originations or other transactions.

Currently, many LIBOR rates, including the one-week and two-month settings are no longer available, while the remaining LIBOR rates will be completely phased out by June 30, 2023.

Regulators, industry groups, and others have, among other things, published recommended replacement language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g.

the Secured Overnight Financing Rate), and proposed implementations of the recommended alternatives in floating rate instruments.

There is not yet consensus on what recommendations and proposals will be broadly accepted.

We have a significant number of loans and borrowings with attributes that are either directly or indirectly dependent on LIBOR.

The transition from LIBOR could create considerable costs and additional risk.

Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR.

The transition will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design, and hedging strategies.

Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.

Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition, and results of operations.

Future acquisitions may be delayed, impeded, or prohibited due to regulatory issues.

Future acquisitions by the Company, particularly those of financial institutions, are subject to approval by a variety of federal and state regulatory agencies.

The process for obtaining these required regulatory approvals has become substantially more difficult in recent years.

Regulatory approvals could be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with regulatory agencies, including, without limitation, issues related to AML and BSA compliance, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations, CRA issues, and other similar laws and regulations.

We may fail to pursue, evaluate or complete strategic and competitively significant acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely manner, under reasonable conditions or at all.

Difficulties associated with potential acquisitions that may result from these factors could have a material adverse effect on our business, and, in turn, our financial condition and results of operations.

We may be exposed to difficulties in combining the operations of acquired businesses into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.

We may not be able to fully achieve the strategic objectives and operating efficiencies that we anticipate in our acquisition activities.

Inherent uncertainties exist in integrating the operations of an acquired business.

In addition, the markets and industries in which the Company and our potential acquisition targets operate are highly competitive.

We may lose customers or the customers of acquired entities as a result of an acquisition.

We also may lose key personnel from the acquired entity as a result of an acquisition.

We may not discover all known and unknown factors when examining a company for acquisition during the due diligence period.

These factors could produce unintended and unexpected consequences for us.

Undiscovered factors as a result of acquisition, pursued by non-related third party entities, could bring civil, criminal, and financial liabilities against us, our management, and the management of those entities acquired.

These factors could contribute to the Company not achieving the expected benefits from its acquisitions within desired time frames.

We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions.

The Department of Justice, the Consumer Finance Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations.

The Department of Justice, the CFPB, and other federal and state agencies are responsible for enforcing these laws and regulations.

Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

A successful challenge to our performance under the fair lending laws and regulations could adversely impact our CRA rating and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on or delays in approving merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

We could experience losses due to competition with other financial institutions.

A successful challenge to our performance under the fair lending laws and regulations could adversely impact our

CRA rating and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on or delays in approving merger and acquisition activity, and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition, and results of operations.

Focus on commercial loans may increase the risk of substantial credit losses.

We offer a variety of loan products, including residential mortgage, consumer, construction, and commercial loans.

At December 31, 2021, approximately 64% of loans were commercial and industrial loans and commercial loans secured by commercial real estate.

It is expected that, as we grow, this percentage will remain fairly constant.

However, future acquisitions of banks with a portfolio composition different from ours could cause this mix to change.

Commercial lending generally involves more risk than mortgage and consumer lending because loan balances are greater, and the borrower's ability to repay is contingent on the successful operation of a business.

Risk of loan defaults is unavoidable in the banking industry.

We attempt to limit exposure to this risk by monitoring carefully the amount of loans in specific industries and by exercising prudent lending practices.

However, the risk that substantial credit losses could result in reduced earnings or losses cannot be eliminated.

The Company's focus on lending to small- to mid-sized community-based businesses may increase its credit risk.

Most of our commercial business and commercial real estate loans are made to small business or middle-market customers.

These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions.

Additionally, these loans may increase concentration risk as to industry or collateral securing our loans.

If general economic conditions in the market areas in which we operate negatively impact this important customer sector, our results of operations and financial condition may be adversely affected.

Moreover, a portion of these loans has been made by the Company recently, and the borrowers may not have experienced a complete business or economic cycle.

The deterioration of the borrowers' businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on our financial condition and results of operations.

We could experience losses due to competition with other financial institutions and non-banks.

We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources.

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There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.

In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources.

We may invest significant time and resources in these efforts.

Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible.

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Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.

In May 2016, we completed the acquisition of SBA Complete.

SBA Complete specializes in consulting with financial institutions across the country related to SBA loan origination and servicing.

We leveraged the expertise assumed in the acquisition of SBA Complete to launch our own SBA Lending Division in the third quarter of 2016.

These are both relatively new lines of business for the Bank with unique operational, control and accounting risks, which if not properly managed, could result in losses for our Company.

In September 2020, we completed the acquisition of Magnolia Financial, which offers accounts receivable financing and factoring, inventory financing and purchase-order financing.

This line of business is new for the Bank and has unique operational, control and accounting risks, which if not properly managed, could result in losses for our Company.

Our reported financial results are impacted by management’s selection of accounting methods and certain assumptions and estimates.

Our accounting policies and methods are fundamental to the way we record and report our financial condition and results of operations.

Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results.

Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results.

In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in reporting materially different results than would have been reported under a different alternative.

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These critical accounting policies include:

the allowance for loan losses;

intangible assets;

and the fair value and discount accretion of acquired loans.

Changes in accounting standards could materially impact our financial statements.

From time to time accounting standards setters change the financial accounting and reporting standards that govern the preparation of our financial statements.

These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.

In some cases, we could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results or a cumulative charge to retained earnings.

See Note 1 – Recent Accounting Pronouncements in the notes to consolidated financial statements included in Item 8.

Financial Statements.

the allowance for credit losses;

business combinations, and goodwill and other intangible assets.

Our business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, our business and a negative impact on our results of operations.

We rely heavily on communications and information systems to conduct our business.

Our daily operations depend on the operational effectiveness of our technology.

We rely on our systems to accurately track and record our assets and liabilities.

Any failure, interruption or breach in security of our computer systems or outside technology, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity, cyber attacks or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems leading to inaccurate financial records.

This could materially affect our business operations and financial condition.

Our daily operations depend on the operational effectiveness of our technology to accurately track and record our assets and liabilities.

Any failure, interruption, or breach in security of our computer systems or outside technology could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems leading to inaccurate financial records.

While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of any failure, interruption, or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed.

The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations.

The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory

scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations.

In addition, the Bank provides its customers the ability to bank online and through mobile banking.

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Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable contractual arrangements or service level agreements.

We maintain a system of policies and procedures designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure, (ii) changes in the vendor’s financial condition and (iii) changes in the vendor’s support for existing products and services.

arrangements or the service level agreements could be disruptive to our operations, which could have a material adverse impact on our business and its financial condition and results of operations.

We maintain a system of policies and procedures designed to monitor vendor risks including, among other things, changes in the vendor’s organizational structure, changes in the vendor’s financial condition, and changes in the vendor’s support for existing products and services.

While we believe these policies and procedures help to mitigate risk, and our vendors are not the sole source of service, the failure of an external vendor to perform in accordance with applicable contractual arrangements or the service level agreements could be disruptive to our operations, which could have a material adverse impact on our business and its financial condition and results of operations.

We are subject to losses due to errors, omissions, or fraudulent behavior by our employees, clients, counterparties, or other third parties.

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We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.

For example, in deciding whether to extend credit to a client, we may assume that the client’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the client.

Our financial condition and results of operations could be negatively affected to the extent we rely on financial statements that do not comply with GAAP or are materially misleading, any of which could be caused by errors, omissions, or fraudulent behavior by our employees, clients, counterparties, or other third parties.

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Although we have historically paid cash dividends, there is no assurance that we will continue to pay cash dividends.

Future payment of cash dividends, if any, will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, economic conditions, and such other factors as the board may deem relevant.

Future payment of cash dividends, if any, will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, capital requirements, economic conditions, and such other factors as the board may deem relevant.

Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.

Although our common stock is listed for trading in The NASDAQ Global Select Market under the symbol “FBNC”, the trading volume in our common stock is lower than that of other larger financial services companies.

Although our common stock is listed for trading on NASDAQ under the symbol “FBNC,” the trading volume in our common stock is lower than that of other larger financial services companies.

A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time.

This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.

Given the relatively low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.

Our stock price can be volatile.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive.

Our stock price can fluctuate significantly in response to a variety of factors including the risk factors discussed elsewhere in this report that are outside of our control and which may occur regardless of our operating results.

An investment in the Company’s common stock is not an insured deposit.

The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.

Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company.

As a result, if you acquire the Company’s common stock, you could lose some or all of your investment.

Given the relatively low trading volume of our common stock, significant sales of our common stock or other volatility in our shares in the public market, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.

We may make future acquisitions, which could dilute current shareholders’ stock ownership and expose us to additional risks.

In accordance with our strategic plan, we evaluate opportunities to acquire other banks, branch locations, and companies that provide products and services related to our banking activities.

Such transactions could have a material effect on our operating results and financial condition, including short- and long-term liquidity, and could require us to issue a significant number of shares of common stock or other securities and/or to use a substantial amount of cash, other liquid assets, and/or incur debt.

Our acquisition activities could involve a number of additional risks, some of which are described in more detail elsewhere in this report and include:

the possibility that expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve;

using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;

incurring the time and expense required to integrate the operations and personnel of the combined businesses;

the possibility that we will be unable to successfully implement integration strategies due to challenges associated with integrating complex systems, technology, banking centers, and other assets of the acquired bank in a manner that minimizes any adverse effect on customers, suppliers, employees, and other constituencies;

the possibility of regulatory approval for the acquisition being delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues surrounding the Company, the target institution or the proposed combined entity;

and losing key employees and customers as a result of an acquisition that is poorly received.

Our authorized capital includes 40,000,000 shares of common stock and 5,000,000 shares of preferred stock.

As of December 31, 2021, we had 35,629,177 shares of common stock outstanding.

In addition, at that date, we had reserved for issuance 445,231 shares of common stock pursuant to options and restricted stock under our existing equity compensation plan.

Subject to applicable NASDAQ rules, our Board generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose, including issuances of equity-based incentives under or outside of our equity compensation plans, issuances of equity in business combination transactions, and issuances of equity to raise additional capital to support growth or to otherwise strengthen our balance sheet.

Risks associated with acquisitions and the resulting integrations may affect costs, revenues, and market value.

A component of our business strategy includes growth through acquisitions.

Costs or difficulties related to integrating the acquired business with the Company might be greater than expected.

Further, expected revenue and/or operational synergies and cost savings associated with pending or recently completed acquisitions may not be fully realized or realized within the expected time frame.

Attractive acquisition or expansion opportunities may not be available to us in the future.

We may consider acquiring other businesses or expanding into new product lines or markets that we believe will help us fulfill our strategic objectives.

We expect that other banking and financial companies, some of which have significantly greater resources, will compete with us to acquire financial services businesses.

Our target base of attractive candidates may be limited, and competition could increase prices for potential acquisitions that we believe are attractive.

Acquisitions may also be subject to various regulatory approvals.

If we fail to receive the appropriate regulatory approvals, we will not be able to consummate acquisitions that we believe are in our best interests.

Unresolved Staff Comments

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors