First Bancorp — 2014 Form 10-K Summary
Business and period. First Bancorp is a North Carolina bank holding company operating First Bank, a regional community bank with 87 branches in North Carolina, South Carolina, and Virginia. The filing reports the fiscal year ended December 31, 2014; comparisons are primarily with 2013.
Financial performance and position
| Metric | 2014 | 2013 | Change/comment |
|---|---|---|---|
| Net interest income | $131.6 million | $136.5 million | Down 3.6% |
| Net interest margin, taxable-equivalent | 4.58% | 4.92% | Down 34 basis points |
| Provision for loan losses | $10.2 million | $30.6 million | Down 66.7% |
| Noninterest income | $14.4 million | $23.5 million | Down 38.8% |
| Noninterest expenses | $97.3 million | $96.6 million | Up 0.7% |
| Net income | $25.0 million | $20.7 million | Up 20.8% |
| Net income available to common shareholders | $24.1 million | $19.8 million | Up 21.8% |
| Diluted EPS | $1.19 | $0.98 | Up 21.4% |
| Return on average assets / common equity | 0.75% / 7.73% | 0.62% / 6.78% | Improved |
Management attributed higher earnings principally to lower loan-loss provisions. The net interest margin fell mainly because of lower acquired-loan discount accretion and asset yields; loan discount accretion declined to $16.0 million from $20.2 million. Noninterest income was also reduced by $12.8 million of FDIC indemnification asset expense.
- Year-end balance sheet: assets were $3.218 billion, up 1.0%; loans were $2.396 billion, down 2.7%; deposits were $2.696 billion, down 2.0%.
- Funding and liquidity: cash and cash equivalents were $253.1 million. Cash and securities equaled 21.2% of deposits and borrowings, versus 16.1% in 2013. Available borrowing facilities included an approximately $423 million FHLB line (with $70 million outstanding), a $50 million federal funds line, and an approximately $78 million Federal Reserve discount-window line.
- Debt: total borrowings were $116.4 million, including $70 million of FHLB term notes and $46.4 million of trust-preferred debt. The FHLB notes mature in 2015; trust-preferred securities have long-dated maturities and variable rates.
- Capital: consolidated total risk-based capital was 17.60%, Tier 1 risk-based capital 16.35%, and leverage capital 11.61%. Tangible common equity to tangible assets was 7.90%, up from 7.46%. Management said the Company and Bank were well above regulatory capital thresholds.
- Asset quality: total nonperforming assets were $114.0 million, down from $152.6 million; the ratio to total assets improved to 3.54% from 4.79%. Non-covered nonperforming assets rose to $95.3 million from $82.0 million, partly because $14.8 million of nonperforming assets moved out of FDIC-covered status. The allowance for loan losses was $40.6 million, or 1.70% of loans.
- Cash flows: operating cash flow was $47.8 million, investing cash flow was negative $25.8 million, and financing cash flow was positive $7.8 million. Cash and cash equivalents increased $29.8 million to $253.1 million.
Material changes and unusual items
- A Cooperative Bank FDIC loss-share agreement covering non-single-family assets expired June 30, 2014. The Company assumed full future loss exposure on transferred loans with a carrying value of $39.7 million and foreclosed properties of $3.0 million. Management did not expect related losses to materially exceed existing allowances.
- Covered nonperforming assets declined to $18.7 million from $70.6 million, reflecting resolutions and property sales as well as the transfer of assets out of covered status. The FDIC indemnification asset fell to $22.6 million from $48.6 million.
- The Company bought approximately $125 million of mortgage-backed securities in the fourth quarter using excess cash. These held-to-maturity securities had a reported average yield of 2.43% and average duration of 6.1 years.
- Nine branches were closed or consolidated in December; the Company recorded about $1.0 million in related expense. No acquisitions were completed in 2014.
- Fourth-quarter 2014 net income was $7.1 million, or $0.34 diluted EPS; common-shareholder income was $6.9 million. The quarter included $1.5 million of loan-loss provision and $23.0 million of noninterest expense.
Outlook, risks, and contingencies
- Management expected 2015 loan growth, supported by economic recovery, fully implemented credit processes, and expansion in North Carolina markets. It expected the covered-loan portfolio to continue declining.
- Management did not expect 2015 provision expense on non-covered assets to be materially above 2014 and said it could be lower. It expected continued net interest margin compression, lower loan discount accretion, and additional regulatory compliance costs.
- The $63.5 million Treasury Series B preferred stock carried a 1% dividend rate, scheduled to rise to 9% in March 2016. Management expected to redeem most or all of it before the increase, without a capital raise.
- In November 2014 the Company received an SEC Wells Notice concerning alleged failures to disclose certain related-party transactions from 2009–2011 and alleged disclosure-control deficiencies. Management considered a settlement more likely than not, anticipated a cease-and-desist order and a penalty not expected to be material, but reported that discussions were ongoing and no final settlement had been reached. The Company said it enhanced related-party transaction controls. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting as of year-end.
- Key risks include the regional economy and real-estate collateral (about 91% of loans were secured by real estate), credit losses, interest-rate and margin pressure, FDIC loss-share compliance and expiry, competition for loans and deposits, regulatory changes, and cybersecurity/vendor disruptions. Management also noted approximately $11 million of performing non-covered loans and $1 million of covered loans could develop problems.
Most important facts for investors to verify
- Whether loan growth and credit quality improved after year-end, particularly non-covered nonperforming assets, residential delinquencies, and real-estate-related exposures.
- Actual 2015 net interest margin and earnings contribution from acquired-loan discount accretion as the remaining discount runs off.
- Subsequent losses on assets no longer protected by the expired FDIC agreement, and the timing and terms of remaining loss-share expirations.
- The outcome, financial penalty, and any control-related requirements arising from the SEC investigation and Wells Notice.
- Whether the Company redeemed the Treasury preferred stock before its 9% rate applied, and the effects on capital, dividends, and liquidity.
- Whether the $125 million securities investment, deposit trends, and 2015 loan commitments produced the expected yields and funding profile.