FIRST BANCORP annual report, FY2015

First Bancorp — 2015 Form 10-K Summary

Business context and reporting period

First Bancorp is a North Carolina bank holding company operating First Bank, with 88 branches across North Carolina, South Carolina, and Virginia. This annual report covers the fiscal year ended December 31, 2015; fourth-quarter figures are identified separately below. The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting.

Financial performance and condition

Metric	2015	2014
Net interest income	$119.7 million	$131.6 million
Noninterest income	$18.8 million	$14.4 million
Provision for loan losses	$(0.8) million (net reversal)	$10.2 million
Net income	$27.0 million	$25.0 million
Net income available to common shareholders	$26.4 million	$24.1 million
Diluted earnings per share	$1.30	$1.19
Return on average assets	0.82%	0.75%
Return on average common equity	8.04%	7.73%
Tax-equivalent net interest margin	4.13%	4.58%

Year-end assets were $3.36 billion, up 4.5%; loans were $2.52 billion, up 5.1%; and deposits were $2.81 billion, up 4.3%.
Operating cash flow was $37.4 million; investing cash flow was $(138.0) million; financing cash flow was $114.8 million. Cash and cash equivalents increased $14.2 million to $267.3 million.
Borrowings rose $70 million to $186.4 million, including $140 million of FHLB advances and $46.4 million of trust-preferred debt. The company reported $342.2 million of shareholders’ equity and an 8.13% tangible common equity ratio.
Capital ratios remained above regulatory thresholds: company common equity Tier 1 was 11.22%, Tier 1 was 13.30%, and total risk-based capital was 14.45%. The Bank was reported well-capitalized.
Liquidity declined modestly: cash and securities were 19.7% of deposits and borrowings, versus 21.2% in 2014. Management said available liquidity, including borrowing capacity, remained adequate.
Credit metrics improved: nonperforming assets fell to $89.3 million from $114.0 million, and non-covered nonperforming assets were 2.37% of non-covered assets versus 3.09%. The allowance for loan losses declined to $28.6 million from $40.6 million; total net charge-offs were $11.3 million, or 0.46% of average loans.
Common dividends were $0.32 per share for the year. The company redeemed all $63.5 million of its Treasury SBLF preferred stock during 2015.
In fourth-quarter 2015, net income available to common shareholders was $6.8 million and diluted EPS was $0.33.

Material changes versus 2014

Common diluted EPS increased 9.2%, chiefly as provisions for credit losses fell substantially. Net interest income nevertheless declined 9.0%, and net interest margin contracted 45 basis points.
Loan discount accretion from failed-bank acquisitions declined to $4.8 million from $16.0 million, reducing interest income. Management attributed the lower accretion to the runoff of acquired loan discounts.
Noninterest income increased 30.6%, principally because FDIC indemnification asset expense declined to $8.6 million from $12.8 million. Core noninterest income, by management’s definition, decreased 3.8% to $29.3 million.
Deposits shifted toward lower-cost transaction accounts: checking, money market, and savings grew by $236.5 million, while time deposits declined $121.1 million. The average cost of interest-bearing deposits fell to 0.26% from 0.32%.
The SBLF preferred-stock redemption reduced reported year-end equity. Total shareholders’ equity was $342.2 million versus $387.7 million in 2014; earnings and common dividends also affected equity.

Outlook, risks, and notable items

Management expected further net interest margin compression in 2016, with loan yields pressured by low long-term rates and competition, and limited scope to reduce already-low deposit costs. It also expected acquired-loan discount accretion to decline.
Management anticipated higher loan-loss provisions than in 2015, alongside continued loan and deposit growth. Expansion in larger North Carolina markets was expected to add expenses before contributing fully to revenue and earnings.
The Bank of Asheville non-single-family FDIC loss-share agreement was due to expire March 31, 2016. At year-end, covered loans in that portfolio were approximately $18 million, including $3 million on nonaccrual; after expiry, the company would bear all further losses on those assets.
Subsequent events: First Bank acquired Bankingport, an insurance agency, on January 1, 2016. In March 2016, the company announced an agreement to exchange seven Virginia branches for six North Carolina branches, with approximately $150 million of deposits transferred out, $130 million transferred in, and up to $175 million of loans involved. Closing was expected in third-quarter 2016, subject to approvals and other conditions.
Other principal risks include local economic and real-estate weakness, concentration in commercial real-estate lending, interest-rate and margin sensitivity, competitive pressure, cybersecurity and third-party technology risks, regulatory costs and capital requirements, and uncertainty in estimates for loan-loss allowances and acquired assets. Moore County represented approximately 16% of deposits.
The company reported no material pending legal proceedings. Its goodwill carrying value was $65.8 million; management reported no impairment in its 2015 assessment.

Important facts for investors to verify

Whether margin pressure and declining purchase-accounting accretion offset expected loan growth in 2016.
Credit performance, allowance adequacy, and the effect of the March 2016 expiration of the Bank of Asheville loss-share coverage.
Execution, regulatory approval, timing, and financial impact of the Virginia–North Carolina branch exchange and Bankingport acquisition.
Post-redemption capital and liquidity capacity, including the phased-in Basel III capital conservation buffer and reliance on FHLB borrowing.
Whether pension-related changes, real-estate values, or other valuation assumptions affect equity, goodwill, or reported earnings.