FIRST BANCORP annual report, FY2018

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First Bancorp — 2018 Form 10-K Summary

Business context and reporting period

First Bancorp is a North Carolina bank holding company operating First Bank, with 101 branches in North Carolina and South Carolina. Its businesses include community banking, mortgage origination, SBA lending and consulting, insurance, and wealth management. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Comparisons are primarily with 2017.

Financial performance and condition

  • Earnings: Net income available to common shareholders was $89.3 million, up 94.2%; diluted EPS was $3.01, up 65.4%. Fourth-quarter net income was $23.9 million and diluted EPS was $0.80.
  • Revenue and margin: Net interest income was $207.4 million, up 25.9%; noninterest income was $61.8 million, up 26.4%. Together these totaled $269.3 million, compared with $213.6 million in 2017. Tax-equivalent net interest margin was 4.12%, versus 4.08%.
  • Profitability and costs: Return on average assets was 1.57%, versus 1.00%; return on average common equity was 12.27%, versus 8.62%. Noninterest expense rose 9.8% to $159.4 million, largely reflecting acquisitions, growth initiatives, and higher personnel costs. The effective tax rate fell to 21.3% from 32.1%, principally reflecting federal tax reform.
  • Credit: The company recorded a $3.6 million reversal of loan-loss provision, compared with a $0.7 million provision in 2017, mainly following large loan recoveries. Net recoveries were $1.3 million. The allowance was $21.0 million, or 0.50% of loans, down from $23.3 million and 0.58%. Nonperforming assets fell to 0.74% of assets from 0.96%; nonperforming assets totaled $43.4 million.
  • Balance sheet and funding: Year-end assets were $5.86 billion, loans $4.25 billion, and deposits $4.66 billion, increases of 5.7%, 5.1%, and 5.7%, respectively. Borrowings were $406.6 million, essentially unchanged. Shareholders’ equity was $764.2 million.
  • Liquidity and capital: Cash and cash equivalents were $462.9 million and securities totaled $602.6 million. Liquid assets were 21.03% of deposits and borrowings, versus 20.0%. Unused FHLB borrowing capacity was approximately $502 million. The company’s CET1, total risk-based capital, and leverage ratios were 12.28%, 13.97%, and 10.47%; the Bank was reported well-capitalized.
  • Cash flow: Operating activities provided $46.4 million; investing activities used $313.3 million; financing activities provided $240.3 million. Cash and cash equivalents declined $26.6 million to $462.9 million. Bank cash flows are affected by lending, deposit, and securities activity and should not be read like industrial-company free cash flow.

Material changes versus 2017

  • Higher 2018 earnings chiefly reflected a full year of contribution from the Carolina Bank and Asheville Savings Bank acquisitions completed in 2017, plus integration efficiencies realized during 2018. Acquisition-related growth also materially increased 2017 results, making year-over-year comparisons less representative of purely organic growth.
  • Organic loan growth was $206.7 million, or 5.1%; deposit growth was $252.4 million, or 5.7%. Deposit growth funded loan growth, while borrowings stayed broadly level.
  • Net interest income benefited from larger earning-asset balances and a four-basis-point margin increase. Average asset yields rose faster than funding costs, but deposit pricing competition intensified.
  • Core noninterest income increased 25.1% to $61.7 million. SBA loan originations reached $196.8 million and SBA loan-sale gains were $10.4 million. Mortgage presale fees declined to $2.7 million from $5.7 million.
  • Net unrealized losses on available-for-sale securities increased to $12.4 million from $2.2 million, primarily attributed by management to interest-rate and market factors rather than credit concerns.

Outlook, risks, contingencies, and unusual items

  • Management described the 2019 outlook as generally favorable, expecting strong local and national economies and continued loan and deposit growth. It expects the net interest margin to remain fairly stable but says maintaining it will be challenging amid deposit competition and a flat yield curve. Its model assumed one 2019 rate increase.
  • Management expects provisions for loan losses to rise from recent unusually low levels to support loan growth and more normal loss experience; further credit deterioration would increase provisions. The allowance had declined to a low level by historical standards.
  • Purchase-accounting loan discount accretion contributed $7.1 million to net interest income in 2018; the remaining acquired-loan discount was $17.3 million. Management expects accretion to decline in 2019 as acquired loans pay down.
  • CECL was scheduled to take effect January 1, 2020. Management was still assessing the impact; it warned that adoption could require earlier and potentially higher expected-credit-loss allowances and reduce retained earnings and regulatory capital.
  • Material risk themes include local economic and real-estate conditions, interest-rate and deposit-cost pressure, credit losses, acquisition integration and goodwill impairment, cybersecurity and third-party service providers, regulatory compliance, and the transition away from LIBOR. Goodwill was $234.4 million; the 2018 impairment review found no impairment.
  • Commitments included $1.29 billion of loan commitments and unfunded credit lines and $15.7 million of standby letters of credit. Management expected draws to be funded through normal operations. It reported no pending legal proceedings believed material to the company.
  • The Board authorized a new share-repurchase program of up to $25 million on February 5, 2019, replacing the prior share authorization; this was after year-end. The 2018 common dividend was $0.40 per share.
  • The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.

Important facts for investors to verify

  • How much of earnings growth is sustainable after the full-year acquisition benefit and integration efficiencies, and how much depends on SBA gains and acquired-loan discount accretion.
  • Whether the 0.50% allowance-to-loans ratio adequately reflects portfolio risk, including commercial real-estate exposure, and what CECL may do to reserves, retained earnings, and capital.
  • Whether deposit costs will rise faster than asset yields, and the implications of large time-deposit maturities and brokered funding for margins and liquidity.
  • Whether organic loan and deposit growth, acquisition integration, and the stated 2019 outlook are being achieved without weakening underwriting or capital.
  • The impact of the $12.4 million available-for-sale securities unrealized loss, goodwill concentration, and the LIBOR transition on future earnings, equity, and funding costs.