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Item 1. Business

2023-02-28 compared with 2022-03-01 · 269 added, 262 removed, 159 unchanged (77% of the section changed)

2 unchanged sentences

At December 31, 2022, the Company had total consolidated assets of $10.6 billion, total loans of $6.7 billion, total deposits of $9.2 billion, and shareholders’ equity of $1.0 billion.

Our principal activity is the ownership and operation of the Bank, a state-chartered bank with its main office in Southern Pines, North Carolina.

Our principal activity is the ownership and operation of the Bank, a state-chartered bank with its headquarters in Southern Pines, North Carolina, through which we engage in a full range of banking activities.

Our principal executive offices are located at 300 SW Broad St., Southern Pines, North Carolina 28387, and our telephone number is (910) 246-2500.

The Company was incorporated in North Carolina on December 8, 1983 for the purpose of acquiring 100% of the outstanding common stock of the Bank through a stock-for-stock exchange.

The Bank began banking operations in 1935 as the Bank of Montgomery, named for the county in which it operated.

In 1985, its name was changed to First Bank.

In September 2013, the Company and the Bank moved their main offices approximately 45 miles from Troy, North Carolina to Southern Pines, North Carolina, in Moore County.

As of December 31, 2021, we conducted business from 121 branches, with 114 branch offices located across North Carolina and seven branches in South Carolina, primarily in the Pee Dee area.

As of year end, the Bank had three wholly-owned subsidiaries, SBA Complete, Magnolia Financial, and First Troy SPE, LLC.

In 1985, its name was changed to First Bank and in September 2013, the Company and the Bank moved their headquarters and main offices to Southern Pines, North Carolina.

As of December 31 2022, the Bank had three wholly-owned subsidiaries, SBA Complete, Magnolia Financial, and First Troy SPE, LLC.

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

Magnolia Financial is a business financing company that offers accounts receivable financing and factoring, inventory financing, and purchase order financing throughout the southeastern United States.

First Troy SPE, LLC, which was organized in December 2009, is a holding entity for certain foreclosed properties.

During 2021, the Bank sold substantially all of the assets of a fourth subsidiary, First Bank Insurance, an insurance agency.

Our principal executive offices are located at 300 SW Broad Street, Southern Pines, North Carolina, 28387, and our telephone number is (910) 246-2500.

Unless the context requires otherwise, references to the “Company,” “we,” “our,” or “us” in this Annual Report shall mean collectively the Company and its consolidated subsidiaries.

General Business

We engage in a full range of banking activities.

We offer deposit products such as checking, savings, and money market accounts, as well as time deposits, including various types of certificates of deposits and individual retirement accounts.

We provide loans for a wide range of consumer and commercial purposes, including loans for business, real estate, personal uses, home improvement, and automobiles.

We offer residential mortgages through our Mortgage Banking Division, and we offer SBA loans to small business owners across the nation through our SBA Lending Division.

Through Magnolia Financial we provide accounts receivable financing and factoring, inventory financing, and purchase order financing.

We also offer credit cards, debit cards, letters of credit, safe deposit box rentals, and electronic funds transfer services, including wire transfers.

In addition, to enhance the convenience of our customers, we provide internet banking, mobile banking, cash management, and bank-by-phone capabilities, and a fleet of ATMs across our branch network.

A mobile check deposit feature is offered to our

mobile banking customers that allows them to securely deposit checks via their smartphone.

For our business customers, we offer remote deposit capture, which empowers them to electronically transmit checks received from their customers into their bank accounts without having to visit a branch.

The Bank is a member of the Certificate of Deposit Account Registry Service (“CDARS”), which gives our customers the ability to obtain FDIC insurance on deposits of up to $50 million, while continuing to work directly with their local First Bank deposit team.

Because the majority of our customers are individuals and small- to medium-sized businesses, we do not believe that the loss of a single customer or group of customers would have a material adverse impact on the Bank.

There are no seasonal factors that tend to have any material effect on the Bank’s business, and we do not rely on foreign sources of funds or income.

Because we operate primarily within North Carolina and northeastern South Carolina, the economic conditions of these areas could have a material impact on the Company.

See additional discussion below in the section entitled “Competition.”

We also offer various ancillary services as part of our commitment to customer service.

Through a contractual relationship, we offer the placement of property and casualty insurance.

We also provide non-FDIC insured investment and insurance products, including mutual funds, annuities, long-term care insurance, life insurance, and company retirement plans, as well as financial planning services through the Bank's investments division, FB Wealth Management Services.

The Bank offers SBA loans to small business owners throughout the nation, which is supported by its subsidiary, SBA Complete.

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

First Troy SPE, LLC is a holding entity for certain foreclosed properties.

During 2021, the Bank sold substantially all of the assets of its insurance agency subsidiary, First Bank Insurance.

The Company is the parent of a series of statutory business trusts organized for the purpose of issuing trust preferred debt securities that qualify as regulatory capital.

See additional discussion below in Item 7 under the section entitled “Borrowings.”

Historically, our branches and facilities have primarily been located in small- to medium-sized communities with economies based primarily on a variety of industries, including services and manufacturing.

Additionally, a number of the communities we serve are “bedroom” communities of large North Carolina cities including Charlotte, Raleigh (Triangle region), and Greensboro/Winston-Salem (Triad region), and many of our branches are located in medium-sized cities such as Albemarle, Asheboro, Asheville, Fayetteville, Greenville, Jacksonville, High Point, Southern Pines, Sanford, and Wilmington.

In recent years, we have implemented a strategy of expansion into larger, higher growth markets.

We opened our first full service branch in Charlotte in August 2016, after opening a loan production office there in 2015.

In Raleigh, we opened a loan production office early in 2016 and upgraded that location to a full-service branch in April 2017.

We subsequently opened three new branches in cities just outside of Raleigh.

We opened our first loan production office in Greensboro in 2016, and we now have 10 branches in the Triad region.

Our expansion into higher growth markets was significantly enhanced by several strategic transactions that occurred in 2016, 2017, and 2021.

See the discussion below entitled “Mergers and Acquisitions.”

We have three markets that hold significant shares of our deposit base.

Moore County, the headquarters of the Company, has total deposits comprising approximately 9.6% of our deposit base.

Buncombe County, the former headquarters of one of our 2017 acquisitions (Asheville Savings), holds 8.6% of our total deposit base, while Guilford County, the former headquarters of another 2017 acquisition (Carolina Bank), holds 7.0% of our deposit base.

Accordingly, material changes in competition, the economy, or the population of these markets could materially impact the Company.

No other market areas comprises more than 5% of our deposit base.

We compete in our various market areas with, among others, several large, interstate bank holding companies.

These large competitors have substantially greater resources than our Company, including broader geographic markets, higher lending limits, and the ability to make greater use of large-scale advertising and promotions.

A significant number of interstate banking acquisitions have taken place in the past few years, thus further increasing the size and financial resources of some of our competitors, some of which are among the largest bank holding companies in the nation.

In many of our markets, we also compete against smaller, local banks.

With banks of all sizes attempting to maximize yields on earning assets, especially in the current low interest rate environment, the competition for high-quality loans remains intense.

Accordingly, loan rates in our markets continue to be under competitive pressure.

Many of the markets we operate in are particularly competitive markets, with at least ten other financial institutions having a physical presence within those markets.

We compete not only against banking organizations, but also against a wide range of financial service providers, including savings institutions, credit unions, mortgage loan originators, investment and brokerage firms, and small-loan or consumer finance companies.

One of the credit unions in our market area is among the largest in the nation.

Competition among financial institutions of all types is virtually unlimited with respect to legal ability and authority to provide most financial services.

Increasingly, we compete with other companies based on financial technology capabilities.

Competition among providers of financial products and services continues to increase as technology advances have lowered the barriers to entry for financial technology companies, with customers having the opportunity to select from a growing variety of traditional and nontraditional alternatives, including crowdfunding, digital wallets, and money transfer services.

The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition.

Because non-bank financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they often can operate with greater flexibility and lower cost structures.

We believe we have certain advantages over our competition in the areas we serve.

Compared to the smaller financial institutions we compete against, our size enables us to absorb more easily the higher costs associated with being in the financial services industry, particularly regulatory costs and technology costs.

We also are able to originate significantly larger loans than many of our smaller competitors.

In our competition with larger banks, we attempt to maintain a community banking culture – a culture that has a personal and local flavor that appeals to many retail and small business customers.

Specifically, we seek to maintain a distinct local identity in each of the communities we serve, and we actively sponsor and participate in local civic affairs.

Most lending and other customer-related business decisions can be made without the delays often associated with larger institutions.

Additionally, employment of local managers and personnel in various offices and low turnover of personnel enable us to establish and maintain long-term relationships with individual and corporate customers.

Mergers and Acquisitions

We pursue an acquisition strategy to augment our organic growth.

We regularly evaluate the potential acquisition of various financial institutions.

Our acquisitions have generally fallen into one of three categories:

1) an acquisition of a financial institution or branch thereof within a market in which we operate, 2) an acquisition of a financial institution or branch thereof in a market contiguous or nearly contiguous to a market in which we operate, or 3) an acquisition of a company that has products or services that we do not currently offer.

Historically, we have paid for our acquisitions with cash and/or common stock.

We have completed numerous acquisitions in each of the three categories described above.

We have completed several whole-bank traditional acquisitions in our existing and contiguous markets, and we have purchased a number of bank branches from other banks (both in existing market areas and in contiguous/nearly contiguous markets).

Also, as discussed below, we acquired companies that specialize in SBA loans and business financing, which brought new products and services to the Company.

In May 2016, we completed the acquisition of SBA Complete, a consultant to financial institutions across the country related to SBA loan origination and servicing.

Many community banks do not have the in-house capability to comprehensively originate and service those types of loans, so they contract with SBA Complete for assistance.

To learn more about this subsidiary of the Bank, please visit www.sbacomplete.com.

Information included on our internet site is not incorporated by reference into this Report.

In connection with our acquisition of SBA Complete, we leveraged its capabilities by launching our own SBA Lending Division.

Through a network of specialized Bank loan officers, this Division offers SBA loans to small business owners throughout the United States.

We typically sell the portion of each loan that is guaranteed by the SBA at a premium and record the non-guaranteed portion to our balance sheet.

To learn more about our SBA Lending Division, please visit www.firstbanksba.com.

Information included on our internet site is not incorporated by reference into this Report.

In July 2016, we exchanged our seven Virginia branches with approximately $151 million in loans and $134 million in deposits for six North Carolina branches of a Virginia bank with approximately $152 million in loans and $111 million in deposits.

Four of the six branches we acquired were in Winston-Salem, with the other two branches located in the Charlotte-metro markets of Mooresville and Huntersville.

The Winston-Salem branches we assumed improved our Triad region expansion initiative, while the Mooresville and Huntersville branches increased our Charlotte market expansion.

We acquired Bankingport, Inc., an insurance agency based in Sanford, North Carolina, in 2016 and Bear Insurance Services, Inc., an insurance agency based in Albemarle, North Carolina, in 2017 to create a platform for providing insurance services throughout our branch network.

After successfully integrating and operating these acquired companies within our subsidiary, First Bank Insurance, we sold substantially all of the assets of this subsidiary effective June 30, 2021 to a Virginia-based insurance services provider for cash and an equity interest in the Virginia acquirer, and entered into an agreement with it to provide insurance services through our branches.

In March 2017, we acquired Carolina Bank, a community bank headquartered in Greensboro with $682 million in assets and eight branches located in Greensboro, Winston-Salem, Burlington, and Asheboro.

This acquisition significantly accelerated our expansion initiative in the Greensboro/Winston-Salem market.

In October 2017, we acquired Asheville Savings which operated in the attractive and high-growth market of Asheville, North Carolina, with $798 million in assets and 13 branches located throughout the Asheville market area.

On September 1, 2020, we completed the acquisition of Magnolia Financial, a business financing company headquartered in Spartanburg, South Carolina, that makes loans throughout the southeastern United States.

Magnolia Financial held $14.6 million in loans at the date of acquisition.

Although not material to our Company’s consolidated operations, the acquisition provided us with the opportunity to enhance our product offerings, such as accounts receivable financing and factoring, inventory financing, and purchase order financing.

For purposes of the discussion below, these statutory business trusts are not included in our consolidated financial statements as they are variable interest entities and the Company is not the primary beneficiary.

See additional discussion below in Item 7 under the section entitled “Borrowings” and Note 1 to the consolidated financial statements.

Recent Developments and Acquisitions

On June 21, 2022, we announced an agreement to acquire GrandSouth Bancorporation ("GrandSouth"), headquartered in Greenville, South Carolina, in an all-stock transaction.

The terms of the agreement provided that each share of GrandSouth common and preferred stock issued and outstanding immediately prior to the effective time of the acquisition would be converted into 0.91 shares of the Company's common stock.

The transaction closed on January 1, 2023, adding eight branches throughout South Carolina and approximately $1.2 billion in total assets, $1.0 billion in loans, and $1.1 billion in deposits to the Company's balance sheet as of the acquisition date.

In October 2021, we acquired Select, a community bank headquartered in Dunn, North Carolina with $1.8 billion in assets, $1.3 billion in loans, and $1.6 billion in deposits.

Select operated from 22 branches located throughout North Carolina, in the Upstate of South Carolina and in Virginia Beach, Virginia.

We have closed or will close and consolidate 12 of Select's branches during 2022.

There are many factors that we consider when evaluating how much to offer for potential acquisition candidates.

The more significant factors we analyze are projected impact on earnings per share, projected impact on capital, and projected impact on book value and tangible book value.

Significant assumptions that affect this analysis include the estimated future earnings stream of the acquisition candidate, estimated credit and other losses to be incurred, the amount of cost efficiencies that can be realized, and the interest rate earned/lost on the cash received/paid.

In addition to these primary factors, we also consider other factors including, but not limited to, marketplace acquisition statistics, location of the candidate in relation to our expansion strategy, market growth potential, management of the candidate, potential integration issues (including corporate culture), and the size of the acquisition candidate.

We plan to continue to evaluate acquisition opportunities that could potentially benefit the Company and its shareholders.

These opportunities may include acquisitions that do not fit the categories discussed above.

Human Capital Resources

Our employees are key to our success.

We are committed to attracting, retaining, and promoting top quality talent regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion, and physical ability.

We strive to identify and select the best candidates for all open positions based on the qualifying factors for each job.

We are dedicated to providing a workplace for our employees that is inclusive, supportive, and free of any form of discrimination or harassment;

rewarding and recognizing our team members based on their individual results and performance;

and recognizing and respecting all of the characteristics and differences that make each of our employees unique.

In 2020, we formed a Diversity Council, which is chaired by our CEO and meets regularly.

The Diversity Council is focused on recommending actions for improvement and identifying barriers that impede progress related to the following areas:

• Creating a work environment that demonstrates all views are respected and provides equal access to opportunities for growth and advancement;

• Ensuring all open positions have a diverse pool of candidates, and our job requirements align with our principles and the markets we serve;

• Creating internal organizational learning opportunities in which associates may voluntarily participate to deepen and develop personal understanding of diversity, equity, and inclusion.

In October 2020, we encouraged our employees to participate in "Global Diversity Awareness Month." Team activity guides promoting diversity and learning about other cultures were distributed to promote this initiative.

Maintaining and further enhancing our corporate culture is an important element of our Board’s oversight of risk because our people are critical to the implementation of our corporate strategy.

Our Board sets the “tone at the top” and holds senior management accountable for embodying, maintaining, and communicating our culture to employees.

Our culture is guided by a philosophy we call Our Promise to Service Excellence.

The principles of Our Promise to Service Excellence are:

Safety and Soundness, Knowledge and Accuracy, Courteous Service, and Convenience and Ease.

We have developed specialized training that all new associates receive, and we hold regular team meetings and training that promote our Service Excellence principles.

By emphasizing a consistent set of principles for all associates, we believe that our associates' work experience is more satisfying, and they are better able to serve their customers consistently and at a high level.

We also seek to design careers with our Company that are fulfilling, with competitive compensation and benefits alongside a positive work-life balance.

We dedicate resources to fostering professional and personal growth with continuing education, on-the-job training, and development programs.

We have worked closely with our employees during the COVID-19 pandemic to ensure their safety and their ability to take care of their families.

we established health safety protocols, facilitated remote work arrangements, and considered ways to provide for family needs, such as child care, all without any employee layoffs or furloughs.

As of December 31, 2021, we had 1,179 full-time and 55 part-time employees.

We are not a party to any collective bargaining agreements, and we consider our employee relations to be good.

Lending Policy and Procedures

Select operated from 22 branches located throughout North Carolina, in the Upstate region of South Carolina and in Virginia Beach, Virginia.

We closed or consolidated 12 of Select's branches during 2022.

The acquisition of Magnolia Financial provided us with the opportunity to enhance our product offerings, such as accounts receivable financing and factoring, inventory financing, and purchase order financing.

In March 2017, we acquired Carolina Bank, a community bank headquartered in Greensboro, North Carolina with $682 million in assets and eight branches located in Greensboro, Winston-Salem, Burlington, and Asheboro.

This acquisition significantly accelerated our expansion initiative in the Greensboro/Winston-Salem market.

Principal Business and Services We Provide

Lending Activities

We maintain a diversified loan portfolio by providing a broad range of commercial and retail lending services to business entities and individuals.

We provide commercial business loans, commercial and residential real estate construction and mortgage loans, revolving lines of credit, letters of credit, and loans for personal uses, home improvement, and automobiles.

Commercial real estate loans include loans secured by owner-occupied commercial buildings for office, storage, retail, and warehouse space.

They also include non-owner occupied commercial buildings such as leased retail and office space.

We originate residential mortgages through our Mortgage Banking Division, some of which we sell in the secondary market.

Through Magnolia Financial we provide accounts receivable financing and factoring, inventory financing, and purchase order financing.

Through a network of specialized Bank loan officers, our SBA Lending Division, and as supported by SBA Complete, we offer SBA loans to small business owners across the nation.

We typically sell the portion of each loan that is guaranteed by the SBA at a premium and record the non-guaranteed portion to our balance sheet.

We generally do not buy loan participations or portions of national credits, but we may acquire balances subject to participation agreements through acquisition.

The total of loan participations purchased at December 31, 2022 was nominal.

There are no seasonal factors that tend to have any material effect on the Bank’s business.

Because we operate primarily within North Carolina and South Carolina, the economic conditions of these areas could have a material impact on the Company.

See additional discussion below in the section entitled “Market Area and Competition.”

Credit Administration and Lending Policies

Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the Bank.

Loans are approved under our written loan policy, which provides that lending officers, principally branch managers, have authority to approve loans of various amounts up to $350,000 with lending limits varying depending upon the experience of the lending officer and whether the loan is secured or unsecured.

We have seven senior lending officers who have authority to approve secured loans up to $500,000, and our Division Banking Executives have authority to approve secured loans up to $1,000,000.

Loans up to $10,000,000 are approved by the Bank’s Regional Credit Officers through our Credit Administration Department.

The Bank’s President and Chief Credit Officer have authority to approve loans up to $25,000,000, while the President and the Chief Credit Officer have joint authority to approve loans up to $75,000,000.

The Bank’s Board maintains loan authority in excess of the Bank’s in-house limit, currently $75,000,000, and generally approves loans through its Executive Loan Committee.

We have sought to maintain a comprehensive lending policy that meets the credit needs of each of the communities served by the Bank, including low- and moderate-income customers, and to employ lending procedures and policies consistent with this approach.

All loans are subject to our corporate loan policy and financing guide, which are reviewed annually and updated as needed.

Our lending policy requires, among other things, an analysis of the borrower's projected cash flow and ability to service the debt.

Individual lending authority is assigned by the Bank’s Chief Credit Officer.

Loans are approved under our written loan policy, which provides that lending officers have sole authority to approve loans of various amounts commensurate with their seniority, experience and needs within the market.

All requests for extensions of credit in excess of any individual lending officer's authority are reviewed by one of our regional credit officers, who can approve loans up to their respective lending authorities which are generally between $5 million and $10 million.

When the request for approval exceeds the authority level of the regional credit officer, the request is then reviewed for approval by the Bank’s Senior Credit Officer who has a lending authority of $20 million.

For loans in excess of this amount, each of the Bank’s President and Chief Credit Officer have individual authority to approve loans up to $25 million, while the President and the Chief Credit Officer have joint authority to approve loans up to the in-house limit of $75 million.

The Board, generally through its Executive Loan Committee, approves loans in excess of the in-house limit.

In addition, the Executive Loan Committee reviews and approves loans to executive officers, directors, and their affiliates.

Our legal lending limit to any one borrower is approximately $176.2 million.

All lending authorities are based on the borrower’s total credit exposure, which is an aggregate of the Bank’s lending relationship with the borrower either directly or indirectly through loan guarantees or other borrowing entities related to the borrower through control or ownership.

The Executive Loan Committee reviews and approves loans that exceed the Bank’s in-house limit, loans to executive officers, directors, and their affiliates and, in certain instances, other types of loans.

New credit extensions are reviewed regularly by our senior management and the Credit Administration Department.

We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action.

Lending and credit administration officers and the Bank’s Board meet periodically to review past due loans and portfolio quality, while assuring that the Bank is appropriately meeting the credit needs of the communities it serves.

Lending and credit administration officers and the Board meet periodically to review past due loans and portfolio quality, the status of large loans and certain other credit or economic related matters which may impact the risk in the portfolio.

Individual lending officers are responsible for monitoring any changes in the financial status of borrowers and pursuing collection of early-stage past due amounts.

For certain types of loans that exceed our established parameters of past due status, the Bank’s Asset Resolution Group assumes the management of the loan, and in some cases we engage a third-party firm to assist in collection efforts.

For certain types of loans that exceed our established parameters of past due status, the Bank’s Asset Resolution Group assumes the management of the loans, and in some cases we engage a third-party firm to assist in collection efforts.

Loans that are serviced by others, such as certain residential mortgage loans, are monitored by the Bank’s credit officers, although ultimate collection of past due amounts is the responsibility of the servicing agents.

The Bank has an internal loan review department that conducts on-going and targeted reviews of the Bank’s loan portfolio and assesses the Bank’s adherence to loan policies, risk grading, and accrual policies.

Reports are generated for management based on these activities and findings are used to adjust risk grades as deemed appropriate.

In addition, these reports are shared with the Bank’s Board.

In addition, these reports are shared with the Board.

The loan review department also provides training assistance to the Bank’s training and credit administration departments.

To further assess the Bank’s loan portfolio, and as a secondary review of the Bank’s loan review department, we also contract with an independent consulting firm to review new loan originations meeting certain criteria, as well as to review risk grades to existing credits meeting certain thresholds.

The consulting firm’s observations, comments, and risk grades, including variances with the Bank’s risk grades, are shared with the audit committee of the Board and are considered by management in setting Bank policy, and in evaluating the adequacy of our allowance for credit losses.

For additional information, see “Allowance for Credit Losses and Loan Loss Experience” under Item 7 below.

Investment Policy and Procedures

We have adopted an investment policy designed to maximize our income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives.

To further assess the Bank’s loan portfolio, in addition to the Bank’s internal loan review department, we also contract with an independent consulting firm to perform independent assessments, including reviewing new loan originations meeting certain criteria and reviewing risk grades of existing credits meeting certain thresholds.

The consulting firm’s observations, comments, and risk grade recommendations, including variances with the Bank’s risk grades, are shared with the Audit Committee of the Board and are considered by management in setting Bank policy, and in evaluating the adequacy of our ACL.

Loan Concentrations

Our commercial loan portfolio consists predominately of owner-occupied real estate and non-owner occupied income-producing real estate and land development loans, which are primarily secured by real estate located in North Carolina and South Carolina.

We categorize these commercial loans by industry according to the North American Industry Classification System (“NAICS”) to monitor the portfolio for possible concentrations in one or more industries.

As of December 31, 2022, we had loans outstanding in one such industry group classification that exceeded 10% of total loans, with total loans of approximately $1.6 billion, or 23.4% of the portfolio, in the classification "lessors of nonresidential buildings".

These loans are generally secured by real estate and are therefore susceptible to changes in real estate valuations and other market disruptions in this sector.

The loans were originated using underwriting standards as set forth by management.

Our loan policies are focused on the risk characteristics of the loan portfolio, including commercial real estate loans, in terms of loan approval and credit quality.

It is the opinion of management that these loans do not pose any unusual risks and that adequate consideration has been given to the above loans in establishing the allowance for loan losses.

Most of our business activity is with customers located within the markets where we have banking operations.

The following table presents the total lending exposure for the counties with the largest percentage of our loan portfolio as of December 31, 2022.

Percentage of Total Loan Portfolio

Wake County, North Carolina 11.6 %

New Hanover County, North Carolina 9.1 %

Mecklenburg County, North Carolina 7.9 %

Buncombe County, North Carolina 6.1 %

Guilford County, North Carolina 5.0 %

No other markets had total loans outstanding in excess of 5% of the total portfolio at year end.

There have been no significant change in the the largest lending markets from the prior year.

We have no concentrations of individual borrowers.

Therefore, while our exposure to credit risk is affected by changes in the economy within our markets, the risk is not significantly concentrated.

Investment Activities

Our investment policy is designed to maximize our income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives.

Pursuant to this policy, we may invest in U.S.

government and GSEs, mortgage-backed securities, collateralized mortgage obligations, commercial mortgage-backed securities, state and municipal obligations, public housing authority bonds, and, to a limited extent, corporate bonds.

We also also invest up to $60 million in time deposits with other financial institutions.

Time deposit purchases from any one financial institution exceeding FDIC insurance coverage limits are evaluated as a corporate bond and are subject to the same due diligence requirements as corporate bonds (described below).

In making investment decisions, we do not solely rely on credit ratings to determine the credit-worthiness of an issuer of securities, but we use credit ratings in conjunction with other information when performing due diligence prior to the purchase of a security.

Securities that are not rated investment grade will not be purchased.

government bonds, GSEs, mortgage-backed securities, collateralized mortgage obligations, commercial mortgage-backed securities, state and municipal obligations, public housing authority bonds, and, to a limited extent, corporate bonds.

We may also invest in time deposits with other financial institutions up to a defined limit.

Investments in our portfolio must satisfy certain quality criteria.

In making investment decisions, we do not solely rely on credit ratings to determine the creditworthiness of an issuer of securities, but we use credit ratings in conjunction with other information when performing due diligence prior to the purchase of a security.

Investments must be “investment-grade” as determined by a nationally recognized investment rating service.

Securities rated below Moody’s BAA or Standard and Poor’s BBB generally will not be purchased.

Securities rated below A are periodically reviewed for credit-worthiness.

We may purchase non-rated municipal bonds only if such bonds are in our general market area and we determine these bonds have a credit risk no greater than the minimum ratings referred to above.

Securities rated below a single-A rating are periodically reviewed for creditworthiness.

We may purchase non-rated municipal bonds only if the issues of bonds are located in our general market area and we determine these bonds have a credit risk no greater than the minimum ratings referred to above.

We also are authorized by our Board to invest a portion of our securities portfolio in high quality corporate bonds, with the amount of such bonds not to exceed 15% of the entire securities portfolio.

Prior to purchasing a corporate bond, the Bank’s management performs due diligence on the issuer of the bond, and the purchase is not made unless we believe that the purchase of the bond bears no more risk to the Bank than would an unsecured loan to the same company.

On a quarterly basis, we review the financial statements for the corporate bond issuers that we own for any signs of deterioration so that we can take timely action if deemed necessary.

Our Chief Investment Officer implements the investment policy, monitors the investment portfolio, recommends portfolio strategies, and reports to the Company’s Investment Committee.

On a periodic basis, we review the financial statements of the issuers of the corporate bonds that we own for any signs of deterioration so that we can take timely action if deemed necessary.

Our Chief Investment Officer implements the investment policy, monitors the investment portfolio, recommends portfolio strategies, and reports to the Bank’s Investment Committee.

The Investment Committee generally meets on a quarterly basis to review investment activity and to assess the overall position of the securities portfolio.

The Investment Committee compares our securities portfolio with portfolios of other companies of comparable size.

In addition, reports of all purchases, sales, issuer calls, net profits or losses and market appreciation or depreciation of the securities portfolio are reviewed by our Board.

Once a quarter, our interest rate risk exposure is evaluated by the Bank’s Board.

In addition, reports of all purchases, sales, issuer calls, net profits or losses and market appreciation or depreciation of the securities portfolio are reviewed by the Board.

Once a quarter, our interest rate risk exposure is evaluated by the Board.

Each year, our written investment policy is reviewed by the Board and appropriate changes are made.

We offer a full range of deposit accounts and services to both retail and commercial customers.

These deposit accounts have a variety of interest rates and terms and consist of interest-bearing and noninterest-bearing accounts, including commercial and retail checking accounts, savings accounts, money market accounts, and time deposits, including various types of certificates of deposits and individual retirement accounts.

The Bank is a member of the CDARS, which gives our customers the ability to obtain FDIC insurance on deposits of up to $50 million, while continuing to work directly with their local First Bank deposit team.

Brokered deposits are deposits obtained by utilizing an outside broker that is paid a fee.

The Bank utilizes brokered deposits to accomplish several purposes, such as acquiring a certain maturity and dollar amount without repricing the deposits of the Bank’s current customers (which could increase or decrease the overall cost of deposit), and acquiring certain maturities and dollar amounts to help manage interest rate risk.

Other Funding Sources

The FHLB allows us to obtain advances through its credit program.

These advances are secured by securities owned by the Bank and held in safekeeping by the FHLB, FHLB stock owned by the Bank and certain qualifying loans secured by real estate, including residential mortgage loans, home equity lines of credit and commercial real estate loans.

As additional sources of funding, we maintain credit arrangements with various other financial institutions to purchase federal funds and participate in the Federal Reserve discount window borrowings program.

Other Services

We also offer credit cards, debit cards, letters of credit, safe deposit box rentals, and electronic funds transfer services, including wire transfers.

In addition, to enhance the convenience of our customers, we provide internet banking, mobile banking and mobile check deposit, cash management, remote deposit capture, bank-by-phone capabilities, and ATMs across our branch network.

We offer various ancillary services as part of our commitment to customer service.

Through a contractual relationship, we offer the placement of property and casualty insurance.

We also provide non-FDIC insured investment and insurance products, including mutual funds, annuities, long-term care insurance, life insurance, and company retirement plans, as well as financial planning services through FB Wealth Management Services, our Investments Division.

Market Area and Competition

We are a community-oriented commercial bank offering a wide variety of financial services to meet the needs of the communities we serve.

As of December 31, 2022, we conducted business from 108 branches, with 101 branch offices located across North Carolina and seven branches in South Carolina, primarily in the Pee Dee area.

Historically, our branches and facilities have been located in small- to medium-sized communities with economies based primarily on a variety of industries, including services and manufacturing.

In more recent years, through both new branches and acquisitions, we have expanded in larger North Carolina cities, including Charlotte, Raleigh (Triangle region), and Greensboro/Winston-Salem (Triad region).

Our expansion into higher growth markets was significantly enhanced by several strategic transactions discussed previously.

Our most recent acquisition of GrandSouth, headquartered in Greenville, South Carolina, has moved us into the desirable Upstate market of that state as well as all its primary growth markets including Charleston and Columbia, South Carolina.

Our primary loan markets were previously presented in the Loan Concentrations section above.

The following table presents the the counties with the largest share of our deposit base as of December 31, 2022.

Percentage of Total Deposits

Moore County, North Carolina 10.9 %

Buncombe County, North Carolina 8.3 %

Guilford County, North Carolina 6.0 %

No other market area comprise more than 5% of our deposit base at year end and there has been no significant change in markets that hold the most significant share of our deposits from the prior year.

We experience strong competition in all aspects of the businesses in which we engage, including both making loans and attracting deposits, from both bank and non-bank competitors.

Broadly speaking, we compete with national banks, super-regional banks, smaller community banks, credit unions, non-traditional internet-based banks and insurance companies and agencies, and other financial intermediaries and investment alternatives, including mortgage companies, credit card issuers, leasing companies, finance companies, money market mutual funds, brokerage firms, governmental and corporate bond issuers, and other securities firms.

Many of these non-bank competitors are not subject to the same regulatory oversight, which can provide them a competitive advantage in some instances, such as operational flexibility and lower cost structures.

In many cases, our competitors have substantially greater resources, including broader geographic markets, higher lending limits, and the ability to make greater use of large-scale advertising and promotions, and offer certain services that we are unable to provide to our customers.

We attempt to compete successfully with our competitors, regardless of their size, by emphasizing customer service, responsiveness, local decision making, and establishing relationships with our customers, while continuing to provide a wide variety of services.

We encounter strong pricing competition in providing our services, particularly in making loans and attracting deposits.

Competition for deposits in our markets and for national brokered deposits is primarily based on the types of deposits offered and rate paid on the deposits.

Given the current rate environment, we have experienced pressure to increase deposit rates in order to retain existing deposits and attract new deposits.

Continued strong competition also exists in all of the lending activities we emphasize.

With banks of all sizes attempting to maximize yields on earning assets and growth of their balance sheets, the competition for high-quality loans remains strong.

Accordingly, loan rates in our markets continue to be under competitive pressure.

We expect competition in the industry to continue to increase mainly as a result of the improvement in financial technology used by both existing and new banking and financial services firms.

Competition may further intensify as additional companies (both banks and non-banks) enter the markets where we conduct business, competitors combine to present more formidable challengers, and we enter mature markets consistent with our expansion strategy.

Human Capital Resources

Our associates are one of our competitive advantages and continued investment in human capital is a top priority for us.

We have historically focused on building a rewarding work environment as we believe that valued and engaged associates lead to satisfied and active customers, which contributes to enriched shareholder value.

We emphasize open and honest communication, collaboration, goal attainment, and personal and professional growth as the foundation to delivering high-quality service to one another and our customers.

As of December 31, 2022, we had 1,244 full-time and 50 part-time associates, the majority of whom are employed by the Bank and are located in North Carolina and South Carolina.

We have associates with our subsidiaries in other states, primarily California.

None of these associates are represented by any collective bargaining agreements, and we consider our employee relations to be good.

Our human capital management strategy focuses on attracting, developing and retaining top quality talent regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion, and physical ability.

We strive to identify and select the best candidates for all open positions based on the qualifying factors for each job.

We are dedicated to providing a workplace for our associates that is inclusive, supportive, and free of any form of discrimination or harassment;

rewarding and recognizing our team members based on their individual results and team performance;

and recognizing and respecting all of the characteristics and differences that make each of our associates unique.

Our workforce consists of approximately 73% females and 15% minorities.

Of our officer population, 61% are female and 8% are minorities, while our executive management team consists of 35% female or minority executives.

In 2020, we formed a Diversity Council, which is chaired by our CEO and meets regularly.

The Diversity Council is focused on providing feedback and recommending actions for improvement, as well as removing barriers that impede progress related to the following areas:

• Creating a work environment that demonstrates all views are respected and provides equal access to opportunities for growth and advancement;

• Ensuring all open positions have a diverse pool of candidates, and our job requirements align with our principles and the markets we serve;

• Creating internal organizational learning opportunities in which associates may voluntarily participate to deepen and develop personal understanding of diversity, equity, and inclusion.

Our Board and its Compensation Committee provide oversight on human capital matters, including overall compensation philosophy, equity award programs, and succession planning.

Our human resources and legal departments develop policies to support and manage our human capital management strategy, identify risks, and implement practices to mitigate those risks, under the oversight of the Board and its committees.

Maintaining and further enhancing our corporate culture is an important element of our Board’s oversight of risk because our people are critical to the implementation of our corporate strategy.

Our Board sets the “tone at the top” and holds senior management accountable for embodying, maintaining, and communicating our culture to associates.

Our culture is guided by a philosophy we call "Our Promise to Service Excellence" ("Our Promise").

The principles of Our Promise are:

Safety and Soundness, Knowledge and Accuracy, Courteous Service, and Convenience and Ease.

All associates joining the Company, including those joining as a result of an acquisition, start their employment by participating in an orientation that focuses on learning about and embracing our culture.

We also seek to design careers with our Company that are fulfilling while fostering professional and personal growth with continuing education, on-the-job training, and development programs.

In 2020, we launched our Leadership Development Program, which consists of three development tracks designed to instruct and enhance leadership skills at various levels of an associate's management experience.

We believe that effective and meaningful leadership development will further elevate the Company and support us in continuing to attract and retain top talent as well as create a succession plan for future growth.

At the end of 2022, we had a total of 46 associates who have completed one of the three leadership development tracks, of which 56% were female or minorities.

We host recruiting and internship programs that attract candidates from a variety of colleges and universities within our footprint.

These programs build a continuous talent pipeline and prioritize these individuals for internal openings.

Providing associates with meaningful, competitive and supportive benefits to care for their lives and families is a top priority for the Company.

We are proud to offer a comprehensive benefits package that includes medical, dental, vision and life insurance, paid time-off, 401(k) profit-sharing plan participation and an employee stock purchase

The Company’s 401(k) plan matches 100% of each employee’s elective deferral amount, up to the first 6% of the contribution.

To augment our health insurance plans, we offer EZaccessMD which provides free access to medical professionals 24/7 for all associates and immediate family members living at their residence, regardless of their participation in our health insurance program.

EZaccessMD provides phone consultation with board certified physicians and medical specialists, as well as a mobile health service that comes to an associate’s home to provide diagnostic and treatment services as needed.

The Company’s benefits programs also include an Employee Assistance Program which provides all associates a comprehensive and personalized process with a tailored approach to meet associates where they are and supports them through issues they may be facing.

The program provides unlimited phone access for information, resources, and referrals and provides sessions with a counselor for the associate and their family members.

Supervision and Regulation

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Changes in statutes, regulations, and polices applicable to Company and the Bank (including their interpretations or implementation) cannot be predicted and could have a material adverse impact on the business and operations of the Company and the Bank.

As a result of the Company’s acquisition of Select, its total assets at December 31, 2021 exceeded $10.0 billion.

Following the Company's acquisition of Select, our total assets exceeded $10.0 billion.

Under current banking regulations and as discussed further below, banks exceeding this asset threshold are subject to heightened supervision and regulation.

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(2) acquiring all or substantially all of the assets of another bank or bank holding company;

or (3) merging or consolidating with another bank holding company.

or (3) merging with another bank holding company.

Holding Company Control of Non-Banks.

With some exceptions, the BHC Act prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries.

The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute, agency regulation, or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.

The principal exceptions to these prohibitions involve certain non-bank activities that are deemed activities closely related to the business of banking or of managing or controlling banks under applicable law.

Transactions with Affiliates.

Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral for loans to any borrower.

The Dodd-Frank Act further extended the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending, and borrowing transactions as covered transactions under the regulations.

It also (1) expands the scope of covered transactions required to be collateralized;

The Dodd-Frank Act further extends the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending and borrowing transactions as covered transactions under applicable regulations.

It also (1) expands the scope of

covered transactions required to be collateralized;

(2) requires collateral to be maintained at all times for covered transactions required to be collateralized;

and (3) places limits on acceptable collateral.

These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds of payments of dividends, interest, and operational expenses.

These restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payments of dividends, interest, and operational expenses.

Tying Arrangements.

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This means that the Company is required to commit, as necessary, capital and resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources or when it may not be in the Company’s or its shareholders’ best interests to do so.

Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to certain other indebtedness of the bank subsidiaries.

Any capital loans a bank holding company makes to its bank subsidiaries are subordinate to deposits and to certain other indebtedness of those subsidiaries.

State Law Restrictions.

As a North Carolina corporation, the Company is subject to certain limitations and restrictions under applicable North Carolina corporate law.

For example, North Carolina corporate law includes limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers, or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.

North Carolina Holding Company Law.

The Commissioner is empowered to regulate certain acquisitions of North Carolina banks and bank holding companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules necessary to effectuate the purposes of those banking laws.

As a North Carolina corporation, the Company is subject to certain limitations and restrictions under applicable North Carolina corporate laws.

For example, those laws include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers, or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.

North Carolina Holding Company Laws.

Supervision and Regulation of the Bank

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Federal banking regulations applicable to all depository financial institutions, among other things:

(i) provide federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices;

(ii) restrict preferential loans by banks to “insiders” of banks;

(iii) require banks to keep information on loans to major shareholders and executive officers;

and (iv) bar certain director and officer interlocks between financial institutions.

(1) provide federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices;

(2) restrict preferential loans by banks to “insiders” of banks;

(3) require banks to keep information on loans to major shareholders and executive officers;

and (4) bar certain director and officer interlocks between financial institutions.

As a state-chartered bank, the Bank is subject to regulation by the Commissioner.

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The Federal Reserve is authorized to approve conversions, mergers, and assumptions of deposit liability transactions between insured banks and uninsured banks or institutions, and to prevent capital or surplus diminution in such transactions if the resulting, continuing, or assumed bank is an insured member bank.

The Bank is a member of the Federal Reserve System, and accordingly the Federal Reserve also conducts periodic examinations of the Bank to assess its safety and soundness and its compliance with banking laws and regulations, and it has the power to implement changes to, or restrictions on, the Bank’s operations if it finds that a violation is occurring or is threatened.

The Bank is a member of the Federal Reserve, and accordingly the Federal Reserve also conducts periodic examinations of the Bank to assess its safety and soundness and its compliance with banking laws and regulations, and it has the power to implement changes to, or restrictions on, the Bank’s operations if it finds that a violation is occurring or is threatened.

Consumer Protection.

The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationships and interactions with consumers, including laws and regulations that impose certain disclosure requirements and that govern the manner in which the Bank takes deposits, makes and collect loans, and provides other services.

The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationships and interactions with consumers, including those that impose certain disclosure requirements and that govern the manner in which the Bank takes deposits, makes and collect loans, and provides other services.

In recent years, examination and enforcement by federal and state banking agencies for non-compliance with consumer protection laws and regulations have increased and become more intense.

Failure to comply with these laws and regulations may subject the Bank to various penalties.

Failure to comply with consumer protection requirements may also result in failure to obtain any required regulatory approval for merger or acquisition transactions we may wish to pursue.

Failure to comply with

consumer protection requirements may also result in failure to obtain any required regulatory approval for merger or acquisition transactions we may wish to pursue.

Community Reinvestment.

The CRA requires that, in connection with examinations of financial institutions within their jurisdiction, federal bank regulators evaluate the record of financial institutions in meeting the credit needs of its local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions.

The CRA requires that, in connection with examinations of an applicable financial institution, federal bank regulators evaluate the record of those institutions in meeting the credit needs of local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution.

A bank's community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions, and applications to open a branch or facility.

In some cases, a bank's failure to comply with the CRA or CRA protests filed by interested parties during applicable comment periods can result in the denial or delay of such transactions.

In some cases, a bank's failure to comply with the CRA or the filing of CRA protests by interested parties during applicable comment periods can result in the denial or delay of such transactions.

Insider Credit Transactions.

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Regulation of Management.

Federal law 1) sets forth circumstances under which officers or directors of a bank may be removed by the bank's federal supervisory agency;

2) places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests;

and 3) generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Federal law sets forth circumstances under which officers or directors of a bank may be removed by the bank's federal supervisory agency, and generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.

Safety and Soundness Standards .

Certain non-capital safety and soundness standards also are imposed upon banks.

These standards cover, among other things, internal controls, information systems and internal audit

systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings, and stock valuation.

These standards cover, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings, regulatory capital and liquidity.

In addition, each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities.

The information security program must be designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such information, and ensure the proper disposal of customer and consumer information.

The program must be designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such information, and ensure the proper disposal of customer and consumer information.

An institution that fails to meet these standards may be required to submit a compliance plan, or be subject to regulatory sanctions, including restrictions on growth.

The Federal Reserve conducts periodic inspections of bank holding companies, such as the Company.

In general, the objectives of this inspection program are to ascertain whether the financial strength of a bank holding company is maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking subsidiaries and its bank subsidiaries.

The inspection type and frequency typically varies depending on asset size, complexity of the organization, and the bank holding company's rating at its last inspection.

Examinations .

Banks are subject to periodic examinations by their primary regulators.

In assessing a bank's condition, bank examinations have evolved from reliance on transaction testing to a risk-focused approach.

These examinations are extensive and cover the entire breadth of the operations of a bank.

Examinations alternate between the federal and state bank regulatory agencies, and in some cases they may occur on a combined schedule.

The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings of its most recent examinations.

However, the examination authority of the Federal Reserve allows it to examine supervised institutions as frequently as deemed necessary based on the condition of the institution or as a result of certain triggering events.

A principal source of the Company's cash is from dividends received from the Bank, which are subject to regulation and limitation.

As a general rule, regulatory authorities may prohibit banks and bank holding companies from paying dividends in a manner that would constitute an unsafe or unsound banking practice.

For example, regulators have stated that paying dividends that deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice and that an institution generally should pay dividends only out of current operating earnings.

In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements.

For example, paying dividends that deplete an institution's capital base to an inadequate level is typically deemed an unsafe and unsound banking

In addition, a bank may not pay cash dividends that would reduce the amount of its capital to less than minimum applicable regulatory capital requirements.

Current guidance from the Federal Reserve provides, among other things, that dividends per share on the Company's common stock generally should not exceed earnings per share, measured over the previous four fiscal quarters.

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In general, these rules limit the Bank's ability to pay dividends unless the Bank's common equity conservation buffer exceeds the minimum required capital ratio by at least 2.5% of risk-weighted assets.

The Federal Reserve has also issued a policy statement on the payment of cash dividends by bank holding companies.

In general, the policy statement expresses the view that although no specific regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not pay cash dividends unless the bank holding company's earnings for the past year are sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company's capital needs, asset quality, and overall financial condition.

The Federal Reserve has also issued a policy statement expressing the view that although no specific regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not pay cash dividends unless its earnings for the past year are sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company's capital needs, asset quality, and overall financial condition.

A bank holding company's ability to pay dividends may also be restricted if a subsidiary bank becomes under-capitalized.

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Dodd-Frank Act

The Dodd-Frank Act was signed into law in July 2010 and it significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading, and operating activities of banks and bank holding companies, including the Bank and the Company.

The Dodd-Frank Act and its related regulations significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading, and operating activities of banks and bank holding companies, including the Bank and the Company.

Some of the provisions of the Dodd-Frank Act that impact the Company's and the Bank's business and operations are summarized below.

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and (4) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions.

In August 2015, the SEC adopted a rule mandated by the Dodd-Frank Act that requires a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees.

This rule is intended to provide shareholders with information that they can use to evaluate a CEO's compensation.

The SEC has adopted rules mandated by the Dodd-Frank Act that require a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees and a comparison of executive compensation to the market performance of the Company's stock.

These rules are intended to provide shareholders with information that they can use to evaluate executive compensation.

Consumer Financial Protection Bureau.

The Dodd-Frank Act established the CFPB and empowered it to exercise broad rulemaking, supervision, and enforcement authority for a wide range of consumer protection laws.

Since the Bank’s total consolidated assets exceeded $10 billion as of December 31, 2021, we now will be subject to the direct supervision of the CFPB.

The CFPB focuses on (i) risks to consumers and compliance with federal consumer financial laws, (ii) the markets in which firms operate and risks to consumers posed by activities in those markets, (iii) depository institutions that offer a wide variety of consumer financial products and services, and (iv) non-depository companies that offer one or more consumer financial products or services.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices.

Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s (i) lack of financial savvy, (ii) inability to protect himself in the selection or use of consumer financial products or services, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests.

The Dodd-Frank Act established the CFPB and empowered it to exercise broad rule making, supervision, and enforcement authority for a wide range of consumer protection laws.

The Bank is subject to the direct supervision of the CFPB as its total assets exceed $10 billion.

The CFPB focuses on (1) risks to consumers and compliance with federal consumer financial laws;

(2) the markets in which firms operate and risks to consumers posed by activities in those markets;

(3) depository institutions that offer a wide variety of consumer financial products and services;

and (4) non-depository companies that offer one or more consumer financial products or services.

The CFPB's consumer financial laws apply to all banks and include, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices.

(2) inability to protect himself in the selection or use of consumer financial products or services;

or (3) reasonable reliance on a covered entity to act in the consumer’s interests.

The CFPB can issue cease and desist orders against banks and other entities that violate consumer financial laws.

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Interchange Fees .

Under the Federal Reserve’s rules issued under the Durbin Amendment, banks with at least $10 billion in total consolidated assets are limited to a maximum permissible interchange fee for an electronic debt transaction equal to the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction.

Prior to December 31, 2021, the Bank qualified for the small issuer exemption from the Federal Reserve’s interchange fees rules issued under the Durbin Amendment.

As of December 31, 2021, the Bank exceeded $10 billion in total consolidated assets, and as such, became subject to limitations of a maximum permissible interchange fee for an electronic debt transaction equal to the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction.

The rules also allow for an upward adjustment of no more than $0.01 to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve certain fraud-prevention standards.

Prior to December 31, 2021, the Company and the Bank qualified for the small issuer exemption from the Federal Reserve’s interchange fees rules.

As of December 31, 2021, however, the Company and the Bank exceeded $10 billion in total consolidated assets.

Beginning July 1, 2022, the interchange fee limit is expected to have a $8.5 million - $9.0 million pre-tax annual impact on the Company’s earnings.

The Federal Reserve conducts periodic inspections of bank holding companies, such as the Company.

In general, the objectives of the Federal Reserve's inspection program are to ascertain whether the financial strength of a bank holding company is maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking subsidiaries and its bank subsidiaries.

The inspection type and frequency typically varies depending on asset size, complexity of the organization, and the bank holding company's rating at its last inspection.

Examinations .

Banks are subject to periodic examinations by their primary regulators.

In assessing a bank's condition, bank examinations have evolved from reliance on transaction testing to a risk-focused approach.

These examinations are extensive and cover the entire breadth of the operations of a bank.

Examinations alternate between the federal and state bank regulatory agencies, and in some cases they may occur on a combined schedule.

The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings of its most recent examinations.

FDIC Insurance

As an FDIC insured depository institution, our deposits are insured up to applicable limits by the DIF of the FDIC.

The basic deposit insurance level is generally $250,000.

As an FDIC insured depository institution, the Bank's deposits are insured up to applicable limits by the DIF which is generally $250,000.

For this protection, each insured bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC.

The FDIC insurance premium is based on an institution’s total assets minus its Tier 1 capital.

An institution’s premiums are determined based on its capital, supervisory ratings and other factors.

Premium rates generally may increase if the FDIC deposit insurance fund is strained due to the cost of bank failures and the number of troubled banks.

In addition, if the Bank experiences financial distress or operates in an unsafe or unsound manner, its deposit premiums may increase.

We recognized approximately $2.7 million, $1.7 million, and $0.3 million in FDIC insurance expense in 2021, 2020, and 2019, respectively.

In November 2018, the FDIC announced that the DIF reserve ratio exceeded the statutory minimum of 1.35% as of September 30, 2018.

Among other things, this resulted in the FDIC awarding assessment credits for banks with less than $10 billion in total assets that had contributed to the DIF in prior years.

We were notified in January 2019 that we had received $1.35 million in credits that would be available to offset deposit insurance assessments once the DIF reached 1.38%.

The DIF reached 1.38% as of June 30, 2019 and therefore, the FDIC began to apply the Bank’s credits to our quarterly deposit insurance assessments beginning with the second quarter of 2019.

Our credits became fully utilized during the first quarter of 2020.

The Dodd-Frank Act made banks with $10 billion or more in total assets, which threshold the Bank exceeded as of December 31, 2021,

responsible for the increase DIF ratio from 1.15% to 1.35%.

Accordingly, we do not expect to receive any further such credits.

The FDIC insurance premium is based on an institution’s total assets minus its Tier 1 capital, and premiums are determined based on its capital, supervisory ratings and other factors.

Premium rates generally may increase if the DIF is strained due to the cost of bank failures and the number of troubled banks.

In addition, if a bank experiences financial distress or operates in an unsafe or unsound manner, its deposit premiums may increase.

The Dodd-Frank Act made banks with $10 billion or more in total assets responsible for increasing the DIF reserve ratio from 1.15% to 1.35% if necessary.

Accordingly, the Bank's premiums may increase from time to time if the FDIC needs to increase assessments in order to replenish the fund and restore the DIF reserve ratio to 1.35%.

Legislative and Regulatory Guidance and Developments

In addition to the regulations that are described above, new legislation is introduced from time to time in the U.S.

Congress that may affect our operations.

In addition, the regulations governing the Company and the Bank may be amended from time to time by the Federal Reserve, the Commissioner, the FDIC, the SEC, or other agencies, as appropriate.

Any legislative or regulatory changes, or changes to accounting standards, in the future could adversely affect our operations and financial condition.

Regulatory Capital Requirement under Basel III.

The Company and the Bank are subject to the Basel III regulatory capital rules adopted in 2013 and fully phased-in as of January 1, 2019.

The Company and the Bank are subject to the Basel III regulatory capital rules that became fully phased-in as of January 1, 2019.

Under Basel III, CET1 is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

Tier I capital is comprised of CET1 capital plus Additional Tier I capital, which for the Company includes non-cumulative perpetual preferred stock and trust preferred securities.

Total capital is comprised of Tier I capital plus certain adjustments, the largest of which for the Company and the Bank is the allowance for credit losses.

Tier I capital is comprised of CET1 capital plus additional elements eligible for inclusion in Tier I capital, which for the Company includes its trust preferred securities.

Total capital is comprised of Tier I capital plus certain adjustments, the largest of which for the Company and the Bank is the ACL.

Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company and the Bank, adjusted for their related risk levels using formulas set forth in Federal Reserve regulations.

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In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications.

Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.

Consumers also have the option to direct banks and other

financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.

Under various policy statements, financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution.

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If, however, we fail to observe the regulatory guidance in the future, we could be subject to various regulatory sanctions, including financial penalties.

In October 2016, the federal banking regulators jointly issued an advance notice of proposed rulemaking on enhanced cyber risk management standards that is intended to increase the operational resilience of large and interconnected entities under their supervision.The advance notice of proposed rulemaking addressed five categories of cyber standards:

(i) cyber risk governance;

(ii) cyber risk management;

(iii) internal dependency management;

(iv) external dependency management;

and (v) incident response, cyber resilience, and situational awareness.

In May 2019, the Federal Reserve announced that it would revisit the Advance Notice of Proposed Rulemaking in the future.

In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” The Notice of Proposed Rulemaking also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

In October 2016, the federal banking regulators jointly issued an advance notice of proposed rule making on enhanced cyber risk management standards that is intended to increase the operational resilience of large and interconnected entities under their supervision.The advance notice addressed five categories of cyber standards:

(1) cyber risk governance;

(2) cyber risk management;

(3) internal dependency management;

(4) external dependency management;

and (5) incident response, cyber resilience, and situational awareness.

In May 2019, the Federal Reserve announced that it would revisit the advance notice of proposed rule making in the future.

In December 2020, the federal banking agencies issued a notice of proposed rule making that would require banking organizations to notify their primary regulators within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” The notice also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data.

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Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures.

While to date we have not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking, and other technology-based products and services by us and our customers.

While to date we have not detected a significant compromise, the risks of significant data loss or any material financial losses related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of internet banking, mobile banking, and other technology-based products and services used by us and our customers.

Anti-Money Laundering and the USA Patriot Act.

The BSA requires all financial institutions to establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism;

The BSA also sets forth various recordkeeping and reporting requirements (such as reporting suspicious activities that might signal criminal activity) and certain due diligence and "know your customer" documentation requirements.

The Patriot Act substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.

sets forth various recordkeeping and reporting requirements (such as reporting suspicious activities that might signal criminal activity);

and mandates certain due diligence procedures and "know your customer" documentation.

creating new crimes and penalties;

and expanding the extra-territorial jurisdiction of the United States.

Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program.

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Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

The AML, which amends the BSA, was enacted in January 2021 and is intended to be a comprehensive reform and modernization to U.S.

bank secrecy and anti-money laundering laws.

The AML, which amends the BSA, is intended to be a comprehensive reform and modernization to United States bank secrecy and anti-money laundering laws.

Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions;

requires the development of standards for evaluating technology and internal processes for BSA compliance;

requires the development of standards for evaluating technology

and internal processes for BSA compliance;

and expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

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The Bank received a rating of “satisfactory” in its most recent CRA examination.

In September 2020, the Federal Reserve released an Advanced Notice of Proposed Rulemaking, seeking public comment on ways to modernize the Federal Reserve’s CRA regulations.

The Advanced Notice of Proposed Rulemaking requests feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and to address inequities in credit access.

We have and will continue to monitor the Federal Reserve’s proposed changes and evaluate any impact on the Company, which will depend on the final form of any Federal Reserve rulemaking and cannot be predicted at this time.

In May 2022, the Federal Reserve released an advanced notice of proposed rule making, seeking public comment on ways to modernize the Federal Reserve’s CRA regulations.

The advanced notice requests feedback on ways to demonstrate how CRA activities qualify for consideration, to evaluate how banks meet the needs of low- and moderate-income communities, and how to address inequities in credit access.

Incentive Compensation.

In June 2010, the federal bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not determine the safety and soundness of such institutions by encouraging excessive risk-taking.

The "Interagency Guidance on Sound Incentive Compensation Policies," which covers all employees who have the ability to materially affect the risk profile of a financial institution, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.

Section 956 of the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities that encourage inappropriate risk-taking by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or that could lead to material financial loss to the entity.

The federal bank regulatory agencies issued such proposed rules in March 2011 and issued a revised proposed rule in June 2016 implementing the requirements and prohibitions set forth in Section 956.

The revised proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, for which it would go beyond the existing "Interagency Guidance on Sound Incentive Compensation Policies" to (i) prohibit certain types and features of incentive-based compensation arrangements for senior executive officers, (ii) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging inappropriate risk, (iii) require appropriate board or committee oversight, (iv) establish minimum recordkeeping, and (v) mandate disclosures to the appropriate federal bank regulatory agency.

In June 2010, the federal bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions are not detrimental to the safety and soundness of such institutions by encouraging excessive risk-taking.

This guidance covers all employees who have the ability to materially affect the risk profile of a financial institution, either individually or as part of a group, and is based upon the key principles that a financial institution’s incentive compensation arrangements should (1) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks;

(2) be compatible with effective internal controls and risk management;

and (3) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.

The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities that encourage inappropriate risk-taking by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or that could lead to material financial loss to the entity.

The federal bank regulatory agencies issued such proposed rules in 2011 and issued a revised proposed rule in 2016 implementing requirements and prohibitions.

The revised proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, and would (1) prohibit certain types and features of incentive-based compensation arrangements for senior executive officers;

(2) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging inappropriate risk;

(3) require appropriate board or committee oversight;

(4) establish minimum recordkeeping;

and (5) mandate disclosures to the appropriate federal bank regulatory agency.

These proposed rules have not yet been finalized.

Federal Securities Laws.

The common stock of the Company is registered with the SEC under the Exchange Act and is subject to the reporting, information disclosure, proxy solicitation, insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act.

The common stock of the Company is registered with the SEC under the Exchange Act and the Company is subject to the reporting, information disclosure, proxy solicitation, insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act.

This includes limits on sales of stock by certain insiders and the filing of insider ownership reports with the SEC.

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Future Legislation and Regulation

Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by

or operating in those states.

Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied.

The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could impact the regulatory structure under which we operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner.

Federal and state regulatory agencies governing the Company and the Bank also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied.

Available Information

We maintain a corporate internet site at www.LocalFirstBank.com, which contains a link within the “Investor Relations” section of the site to each of our filings with the SEC, including our Annual Reports, as well as our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

We maintain a corporate internet site at www.LocalFirstBank.com, which contains a link within the “Investor Relations” section of the site to each of our filings with the SEC, including our annual reports on Form 10-K, as well as our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.

These filings are available, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

These filings can also be accessed at the SEC’s website located at www.sec.gov.

Information included on our internet site is not incorporated by reference into this annual report.

Information included on our internet site is not incorporated by reference into this Report.

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 1. Business