FIRST BANCORP annual report, FY2016

Vollständiges Dokument

First Bancorp — 2016 Form 10-K Summary

Business and period: First Bancorp is a North Carolina bank holding company operating First Bank, with 88 branches across North Carolina and South Carolina. This annual report covers the year ended December 31, 2016; quarterly comparisons below refer to the fourth quarter.

Financial performance and position

  • Earnings: Net income was $27.5 million, up 1.8% from $27.0 million in 2015. Net income available to common shareholders was $27.3 million; diluted EPS was $1.33, up 2.3% from $1.30.
  • Fourth quarter: Net income available to common shareholders was $8.36 million and diluted EPS was $0.40, compared with $6.76 million and $0.33 in fourth-quarter 2015.
  • Net interest: Net interest income was $123.4 million, up 3.0%. Tax-equivalent net interest margin declined to 4.03% from 4.13%, reflecting lower loan yields and continued rate pressure.
  • Other income and expenses: Noninterest income rose 36.2% to $25.6 million, including $3.2 million of SBA consulting fees and $1.4 million of SBA loan-sale gains. Noninterest expense rose 8.9% to $106.8 million, largely due to growth initiatives, acquisitions and expansion.
  • Credit quality: Nonperforming assets fell 33.8% to $59.1 million, or 1.64% of assets, from $89.3 million, or 2.66%. Net charge-offs declined to $3.7 million from $11.3 million. The allowance for loan losses was $23.8 million, 0.88% of loans, versus $28.6 million, or 1.13%, in 2015.
  • Balance sheet: Assets increased 7.5% to $3.615 billion; loans rose 7.6% to $2.711 billion; deposits rose 4.8% to $2.947 billion. Shareholders’ equity was $368.1 million.
  • Funding and liquidity: Borrowings increased to $271.4 million from $186.4 million. Brokered deposits rose to $136.5 million from $76.4 million as loan growth exceeded deposit growth. Cash and securities were 19.8% of deposits and borrowings, versus 19.7%. The company reported $289 million of unused FHLB capacity, plus available $35 million correspondent and approximately $101 million Federal Reserve lines.
  • Cash flow: Operating activities provided $47.5 million; investing activities used $246.3 million, including loan growth and acquisitions; financing activities provided $237.6 million. Cash and cash equivalents ended the year at $306.0 million.
  • Capital and shareholder returns: Company total risk-based capital was 13.36%; common equity Tier 1 was 10.92%; tangible common equity to tangible assets was 8.16%. The Bank remained well capitalized. Common dividends were $0.32 per share for the year.

Material changes versus 2015

  • Earnings growth was supported by loan and deposit growth and new SBA and insurance activities; returns softened slightly, with return on average assets at 0.80% versus 0.82% and return on average common equity at 7.73% versus 8.04%.
  • The margin continued to contract, while net interest income increased on loan-volume growth. Purchase-accounting loan discount accretion fell to $4.5 million from $4.8 million; management expects it to continue declining.
  • The FDIC loss-share agreements were terminated on September 22, 2016. First Bank paid $2.0 million to end the agreements, wrote off the remaining $5.7 million indemnification asset, and thereafter bears the losses and recoveries on those acquired assets.
  • In July, the company exchanged seven Virginia branches for six North Carolina branches and recorded a $1.5 million gain. It also acquired Bankingport and SBA Complete, and launched a national SBA lending business.
  • Deposits shifted toward lower-cost transaction accounts, while retail time deposits declined. Increased brokered deposits and borrowings helped fund loan growth.
  • The company redeemed its Treasury SBLF preferred stock in 2015; in December 2016, remaining Series C preferred shares were exchanged one-for-one for common shares. No preferred shares remained at year-end.

Outlook, risks and unusual items

  • Management expected continued loan and deposit growth in 2017, but anticipated further net interest margin compression, with loan yields stable to lower and pressure to raise deposit rates.
  • Management expected 2017 loan-loss provision to exceed 2016’s near-zero net provision, as charge-offs and expected loan growth require reserves.
  • Carolina Bank was acquired on March 3, 2017, after year-end. It had approximately $705 million in assets, $530 million in gross loans and $598 million in deposits. Consideration included $25.3 million cash and approximately 3.8 million First Bancorp shares; integration, dilution and final purchase accounting remain relevant.
  • Key risks include local economic and real-estate weakness, loan concentration in the company’s regional footprint, competitive pressure on loan pricing and deposits, interest-rate sensitivity, lower purchase-accounting accretion, regulatory and cybersecurity obligations, and acquisition execution. Management noted approximately $5 million of performing loans with potential to develop problems.
  • Other notable items: the 2016 indemnification expense was $10.3 million, including the $5.7 million termination-related charge; goodwill was $75.0 million and was not impaired. Auditors issued an unqualified opinion on the financial statements and internal controls.

Most important facts for investors to verify

  • Whether loan growth can continue without weakening underwriting or requiring materially higher provisions, particularly given the 0.88% allowance-to-loans ratio and management’s expectation of higher 2017 provisions.
  • Whether the margin stabilizes as acquired-loan discount accretion declines and deposit costs respond to rate increases.
  • How funding evolves: brokered deposits rose sharply, borrowings increased, and year-end loans were about 92% of deposits.
  • Carolina Bank integration, realized cost and revenue benefits, final acquired-asset valuations, and the effect of cash consideration and new shares on capital and per-share earnings.
  • The performance and controls of the newer SBA consulting and lending businesses, whose contribution increased noninterest income.
  • Whether local credit conditions, nonperforming assets, foreclosed real estate and the approximately $5 million in potential problem loans remain consistent with reported asset-quality improvement.