First Bancorp (FBNC) — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. First Bancorp is a North Carolina bank holding company operating First Bank, with 101 branches in North Carolina and South Carolina.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $216.2 million | $207.4 million |
| Noninterest income | $59.5 million | $58.9 million |
| Noninterest expense | $157.2 million | $156.5 million |
| Net income | $92.0 million | $89.3 million |
| Diluted earnings per share | $3.10 | $3.01 |
| Tax-equivalent net interest margin | 4.00% | 4.09% |
| Return on average assets / common equity | 1.53% / 11.32% | 1.57% / 12.27% |
- At year-end, assets were $6.14 billion, loans $4.45 billion, deposits $4.93 billion, and shareholders’ equity $852.4 million. Loans grew 4.8% and deposits 5.8% year over year.
- Operating cash flow was $51.2 million, compared with $46.4 million in 2018. Investing cash outflow was $424.7 million, primarily reflecting securities purchases; financing cash inflow was $141.9 million. Cash and cash equivalents declined to $231.3 million from $462.9 million.
- Borrowings fell $105.9 million to $300.7 million. Liquid assets were 21.4% of deposits and borrowings, versus 21.0% a year earlier; unused FHLB borrowing capacity was approximately $610 million.
- Regulatory capital remained strong: the Company’s CET1, total risk-based capital, and leverage ratios were 13.28%, 14.89%, and 11.19%, respectively. The Bank was reported as well-capitalized.
Material changes versus 2018
- Net income increased 3.1%, supported mainly by 4.2% growth in net interest income as average earning assets expanded. Earnings growth was partly offset by margin compression and a return to positive loan-loss provisioning.
- The provision for loan losses was $2.3 million, compared with a $3.6 million reversal in 2018, when large recoveries contributed to the reversal. Net charge-offs were $1.9 million in 2019 versus net recoveries of $1.3 million in 2018.
- Asset quality improved by the nonperforming-assets-to-total-assets measure, to 0.62% from 0.74%. Nonperforming loans were $33.9 million, versus $36.0 million; nonaccrual loans alone rose to $24.9 million from $22.6 million.
- Retail deposits grew 9.6%, enabling brokered deposits to decline 64.1% to $86.1 million. The company also repurchased $10 million of shares and declared $0.54 per share in dividends, up from $0.40.
- Available-for-sale securities increased substantially, to $821.9 million from $501.4 million. Securities-related other comprehensive income contributed to a $17.1 million increase in 2019 comprehensive income beyond net income.
Outlook, risks, and unusual items
- Management described its 2020 outlook as generally stable and expected continued organic loan and deposit growth. It anticipated ongoing net interest margin pressure from low market rates, competitive pricing, and limited scope to lower funding costs further; its model projected a slight 2020 margin decline under an unchanged-rate assumption.
- Management expected loan-loss provisions to rise from recent low levels to support loan growth and more normal losses, while noting that credit deterioration could require further increases.
- CECL adoption began January 1, 2020. The company estimated its allowance for credit losses would increase to approximately $40–$44 million from the $21.4 million year-end 2019 allowance. The initial effect was to be recorded through retained earnings; the filing did not quantify the final retained-earnings adjustment.
- Credit exposure warrants attention: commercial real estate and other commercial mortgage loans were 43% of total loans. Management identified $3–$7 million of performing loans with potential to develop problems, depending on borrower and economic conditions.
- Other stated risks include interest-rate sensitivity, local economic and real-estate conditions, cybersecurity and third-party service providers, acquisition execution, and the transition away from LIBOR. The filing also referenced the emerging coronavirus outbreak as a potential economic risk.
- FDIC insurance expense was reduced to $0.3 million in 2019 by assessment credits; management expected the credits to be exhausted by the end of first-quarter 2020 and FDIC expense to increase in 2020. The 2019 adoption of lease accounting recognized approximately $19.4 million of operating lease assets and liabilities.
- Outstanding loan commitments and unused lines totaled approximately $1.32 billion; standby letters of credit were $12.0 million. Management reported no pending legal proceeding it believed material. The auditor issued an unqualified opinion on the 2019 financial statements and internal controls; the allowance for loan losses was identified as a critical audit matter.
Important facts for investors to verify
- Whether 2020 net interest margin and earnings track management’s expectations amid falling or low rates and competitive deposit pricing.
- The actual CECL opening allowance, retained-earnings impact, and subsequent provision volatility compared with the estimated $40–$44 million allowance.
- Whether credit quality remains sound, especially in commercial mortgage and SBA portfolios, and how the identified potential problem loans perform.
- Whether retail deposit growth continues to replace brokered funding, and how liquidity and borrowing capacity evolve as commitments are funded.
- The sustainability of fee income, including SBA loan-sale gains and insurance commissions, and the expected increase in FDIC insurance expense after credits expire.