First Bancorp — 2017 Form 10-K Summary
Business context and reporting period. First Bancorp is a North Carolina bank holding company operating First Bank, with 104 branches in North Carolina and South Carolina. This annual report covers the year ended December 31, 2017; quarterly figures below refer to the fourth quarter. The company completed acquisitions of Carolina Bank in March and Asheville Savings Bank in October, expanding its presence in the Triad and Asheville markets.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income | $164.7 million | $123.4 million |
| Provision for loan losses | $0.7 million | $(0.02) million (reversal) |
| Noninterest income | $48.9 million | $25.6 million |
| Noninterest expense | $145.2 million | $106.8 million |
| Net income | $46.0 million | $27.5 million |
| Diluted earnings per share | $1.82 | $1.33 |
| Net interest margin, taxable-equivalent | 4.08% | 4.03% |
| Return on average assets | 1.00% | 0.80% |
| Return on average common equity | 8.62% | 7.73% |
- Fourth-quarter 2017 net income was $14.2 million and diluted EPS was $0.48, compared with $8.4 million and $0.40 in fourth-quarter 2016.
- At year-end, assets were $5.55 billion, loans $4.04 billion, deposits $4.41 billion, borrowings $407.5 million, and shareholders’ equity $693.0 million.
- Operating cash flow was $26.8 million; investing activities used $128.5 million and financing activities provided $285.2 million. Cash and cash equivalents rose by $183.5 million to $489.5 million.
- Liquidity: cash and securities were 20.0% of deposits and borrowings. Available borrowing sources included an FHLB line, with $384 million unused after collateral requirements, a $35 million correspondent-bank line and approximately $109 million of FRB discount-window capacity.
- Total risk-based capital was 12.50% and the leverage ratio was 9.58%; the Bank exceeded regulatory “well-capitalized” thresholds. The tangible common equity-to-tangible assets ratio was 8.23%.
Material changes versus the prior comparable period
- Net income increased 67.1% and diluted EPS increased 36.8%. Management attributed the improvement primarily to the two bank acquisitions, organic growth and other profitability initiatives. The acquisitions contributed $1.10 billion of loans and $1.26 billion of deposits at closing; organic loans grew $228.0 million (8.4%) and organic deposits $195.1 million (6.6%).
- Year-end assets grew 53.5%, loans 49.1% and deposits 49.5%, largely reflecting the acquisitions. Common shares outstanding increased from 20.8 million to 29.6 million; $284.2 million of common stock was issued in acquisition transactions.
- Net interest margin edged up 5 basis points as asset yields rose following Federal Reserve rate increases, while funding costs also began rising. Net loan charge-offs fell to $1.2 million from $3.7 million; nonperforming assets declined to $53.4 million, or 0.96% of assets, from $59.1 million, or 1.64%.
- Noninterest expense rose 35.9%, including $8.1 million of merger and acquisition costs, higher staffing and integration costs, and increased intangible amortization. Noninterest income growth included SBA consulting fees and gains from SBA loan sales.
Outlook, risks and unusual items
- Management described the 2018 outlook as generally favorable, expecting continued economic improvement and loan and deposit growth. It projected an effective tax rate of approximately 21% and expected low loan-loss provisions if asset quality remained stable.
- Management expected the 2018 net interest margin to remain fairly stable under a model assuming two rate increases. It cautioned that deposit-rate competition was increasing and loan pricing remained competitive. The company’s interest-rate sensitivity schedule showed $1.28 billion more interest-bearing liabilities than earning assets repricing within 12 months.
- The Tax Cuts and Jobs Act reduced the federal corporate rate to 21%. Revaluation of deferred taxes produced a $1.3 million fourth-quarter 2017 tax benefit; the estimate remained subject to refinement.
- Acquisitions created $233.1 million of goodwill, about $157 million of which was recorded in 2017. Goodwill was not impaired in the 2017 test. Integration, credit marks and future impairment remain relevant risks; a contingent liability assumed with Carolina Bank was still under evaluation.
- Credit indicators improved, but the allowance for loan losses declined to $23.3 million (0.58% of loans), partly because acquired loans were initially recorded at fair value with discounts rather than a day-one allowance. Remaining unaccreted loan discount was $26.9 million. Commercial real estate represented 42% of loans.
- Funding growth included brokered deposits, which rose to $239.7 million, and increased borrowings. The company noted that loan growth had outpaced core deposit growth in newer markets. About 70% of deposits of $100,000 or more matured within one year.
- Other notable items: fourth-quarter employee bonuses were approximately $1.1 million; the company planned to terminate and liquidate its frozen defined-benefit pension plan in 2018 and expected to fund any amount needed for full funding. The independent auditor gave an unqualified financial-statement opinion and reported effective internal controls; Asheville Savings Bank, acquired in fourth-quarter 2017, was excluded from the internal-control assessment.
Most important facts for investors to verify
- How much of earnings growth and future margin depends on acquisition-related loan discount accretion, and how that accretion changes as acquired loans repay or perform.
- Whether acquisitions deliver expected growth and efficiencies after integration, including resolution of the Carolina Bank contingent liability and conversion of Asheville Savings Bank systems.
- Credit quality and reserve coverage, particularly in commercial real estate, acquired loans and the acquired purchased-credit-impaired portfolio.
- Deposit retention, brokered-deposit reliance, upcoming large-deposit maturities and the cost and availability of borrowings as rates rise.
- Whether capital and liquidity remain adequate after acquisition integration, planned pension-plan termination and any future loan growth or distributions.
- Final tax-reform accounting and the realized effective tax rate, alongside the sustainability of the reported earnings improvement.