First Bancorp Reports Fourth Quarter and Annual Results

SOUTHERN PINES, N.C., Jan. 28, 2016 /PRNewswire/ -- First Bancorp (NASDAQ: FBNC), the parent company of First Bank, announced today net income available to common shareholders of $26.4 million, or $1.30 per diluted common share, for the year ended December 31, 2015, an increase of 9.5% compared to the $24.1 million, or $1.19 per diluted common share, for the year ended December 31, 2014. 

For the three months ended December 31, 2015, the Company recorded net income available to common shareholders of $6.8 million, or $0.33 per diluted common share, a decrease of 1.7% compared to the $6.9 million, or $0.34 per diluted common share, recorded in the fourth quarter of 2014.

Highlights for the quarter and year include:

• Legacy loan growth of $41.2 million for the fourth quarter of 2015, which represents 6.9% annualized growth. Legacy loan growth for the year was $147.7 million, an increase of 6.5%.
       
• Deposit growth of $103.5 million for the fourth quarter of 2015, which represents 15.2% annualized growth. Deposit growth for the year amounted to $115.4 million, an increase of 4.3%.
       
• On October 16, 2015, the Company redeemed the remaining $31.5 million of preferred stock associated with its participation in the Treasury's Small Business Lending Fund. The Company had previously redeemed $32 million in June 2015.

Net Interest Income and Net Interest Margin

Net interest income for the fourth quarter of 2015 amounted to $30.1 million, a 2.8% decrease from the $30.9 million recorded in the fourth quarter of 2014.  Net interest income for the year ended December 31, 2015 amounted to $119.7 million, a 9.0% decrease from the $131.6 million recorded in 2014.

The Company's net interest margin (tax-equivalent net interest income divided by average earning assets) in the fourth quarter of 2015 was 4.05% compared to 4.25% for the fourth quarter of 2014.  For the year ended December 31, 2015, the Company's net interest margin was 4.13% compared to 4.58% in 2014.  The lower margins in 2015 compared to 2014 were primarily due to lower amounts of discount accretion on loans purchased in failed-bank acquisitions.  As shown in the accompanying tables, loan discount accretion amounted to $0.9 million in the fourth quarter of 2015, compared to $2.2 million in the fourth quarter of 2014.  For the full year of 2015, loan discount accretion amounted to $4.8 million compared to $16.0 million for 2014.  The lower amount of accretion is due to the continued winding down of the unaccreted discount amount that resulted from failed-bank acquisitions in 2009 and 2011.

Excluding the effects of discount accretion on purchased loans, the Company's net interest margin has remained stable, amounting to 3.94% for the fourth quarter of 2015 compared to 3.96% for the fourth quarter of 2014.  Higher levels of loans and securities in 2015 substantially offset lower earning asset yields.  See the Financial Summary for a table that presents the impact of loan discount accretion that affects net interest income. Also see the Financial Summary for a reconciliation of the Company's net interest margin to the net interest margin excluding loan discount accretion, and other information regarding this ratio.  

The Company's cost of funds declined from 0.27% in the fourth quarter of 2014 to 0.24% in the fourth quarter of 2015, which had a positive impact on the Company's net interest margin.

Provision for Loan Losses and Asset Quality

The Company recorded negative total provisions for loan losses (reduction of the allowance for loan losses) of $43,000 in the fourth quarter of 2015 compared to provisions for loan losses of $1.5 million in the fourth quarter of 2014.  For the year ended December 31, 2015, the Company recorded a negative total provision for loan losses of $0.8 million compared to provision for loan losses of $10.2 million for 2014.  As discussed below, the Company records provisions for loan losses related to both non-covered and covered loan portfolios – see explanation of the terms "non-covered" and "covered" in the section below entitled "Note Regarding Components of Earnings."

The provision for loan losses on non-covered loans amounted to $0.6 million in the fourth quarter of 2015 compared to $1.3 million in the fourth quarter of 2014.  For the full year of 2015, the provision for loan losses on non-covered loans amounted to $2.0 million compared to $7.1 million for 2014.  The lower provisions recorded in 2015 were primarily a result of continued favorable credit quality trends and generally improving economic trends.

The Company recorded a negative provision for loan losses on covered loans (reduction of allowance for loan losses) of $0.7 million in the fourth quarter of 2015 compared to a $0.2 million provision for loan losses in the fourth quarter of 2014.  For the twelve months ended December 31, 2015, the Company recorded a negative provision for loan losses on covered loans of $2.8 million compared to a $3.1 million provision for loan losses in 2014.  The negative provisions in 2015 primarily resulted from lower levels of covered nonperforming loans, declining levels of total covered loans, and net loan recoveries (recoveries, net of charge-offs) of $0.6 million and $2.3 million that were realized during the three and twelve months ended December 31, 2015, respectively.

Total non-covered nonperforming assets declined 19.0% during 2015, amounting to $77.2 million at December 31, 2015 (2.37% of total non-covered assets) compared to $95.3 million at December 31, 2014 (3.09% of total non-covered assets).  The decline in non-covered nonperforming assets is primarily due to on-going resolution of nonperforming assets and improving credit quality.

Total covered nonperforming assets also declined in 2015, amounting to $12.1 million at December 31, 2015 compared to $18.7 million at December 31, 2014.  Over the past twelve months, the Company has resolved a significant amount of covered loans and has experienced strong property sales along the North Carolina coast, which is where most of the Company's covered assets are located.

Noninterest Income

Total noninterest income was $5.7 million and $4.5 million for the three months ended December 31, 2015 and December 31, 2014, respectively.  For the year ended December 31, 2015, noninterest income amounted to $18.8 million compared to $14.4 million for the year ended December 31, 2014. 

Core noninterest income amounted to $7.4 million for both of the three month periods ended December 31, 2015 and 2014.  For the full year of 2015, core noninterest income amounted to $29.3 million, a 3.8% decrease from the $30.5 million recorded in 2014.  Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgages, iv) commissions from financial product sales, and v) bank-owned life insurance income.  Service charges on deposit accounts declined from $3.3 million in the fourth quarter of 2014 to $2.9 million in the fourth quarter of 2015.  For the full year of 2015, service charges on deposit accounts amounted to $11.6 million, a $2.1 million decrease from the $13.7 million recorded in 2014.

Noncore components of noninterest income resulted in a net decrease to income of $1.7 million in the fourth quarter of 2015 compared to a net decrease to income of $2.9 million in the fourth quarter of 2014.  For the year ended December 31, 2015 and 2014, the Company recorded net decreases to income of $10.6 million and $16.1 million, respectively, related to the noncore components of noninterest income.  The largest variances in noncore noninterest income related to gains (losses) on covered foreclosed properties and indemnification asset income (expense) – see discussion below.

For both of the three month periods ended December 31, 2015 and 2014, the Company recorded gains on covered foreclosed properties of $0.6 million.  For the full year of 2015, the Company recorded gains of $1.0 million compared to losses of $1.9 million in 2014.  Losses on covered foreclosed properties have generally declined in recent quarters as a result of significantly lower levels of covered foreclosed properties held by the Company and stabilization in property values.

Indemnification asset income (expense) is recorded to reflect additional (decreased) amounts expected to be received from the FDIC during the period related to covered assets.  The three primary items that result in recording indemnification asset income (expense) are 1) income from loan discount accretion, which results in indemnification expense, 2) provisions for loan losses on covered loans, which result in indemnification income and 3) foreclosed property gains (losses) on covered assets, which result in indemnification expense (income).  In the fourth quarter of 2015, the Company recorded $1.5 million in indemnification asset expense compared to $3.1 million in indemnification asset expense in the fourth quarter of 2014.  For the year ended December 31, 2015, indemnification asset expense amounted to $8.6 million compared to $12.8 million in indemnification asset expense for 2014.  The lower amounts of indemnification expense in 2015 are associated with the significantly lower amounts of loan discount accretion income recorded.  Generally, when loan discount interest income is recorded, the Company records indemnification asset expense amounting to approximately 80% of the amount of loan discount accretion.  See additional discussion related to this matter in the section below entitled "Note Regarding Components of Earnings."

Noninterest Expenses

Noninterest expenses amounted to $25.5 million in the fourth quarter of 2015 compared to $23.0 million recorded in the fourth quarter of 2014.  Noninterest expenses for the year ended December 31, 2015 amounted to $98.1 million compared to $97.3 million recorded in 2014. 

Salaries expense rose in 2015 as a result of the hiring of additional staff to drive growth, as well as higher incentive compensation expense related to the Company's performance.  The line item "Other operating expenses" amounted to $7.9 million for the fourth quarter of 2015 compared $6.7 million in the fourth quarter of 2014.  In the fourth quarter of 2014, the Company determined that approximately $1.0 million in collections expenses incurred in prior years associated with covered assets were eligible to be claimed for reimbursement with the FDIC, which resulted in a $1 million reduction in other operating expenses for that quarter.

Balance Sheet and Capital

Total assets at December 31, 2015 amounted to $3.4 billion, a 4.5% increase from a year earlier.  Total loans at December 31, 2015 amounted to $2.5 billion, a 5.1% increase from a year earlier, and total deposits amounted to $2.8 billion at December 31, 2015, a 4.3% increase from a year earlier. 

Non-covered loans amounted to $2.42 billion at December 31, 2015, an increase of $147.7 million, or 6.5% from December 31, 2014, as a result of ongoing internal initiatives to drive loan growth.  Loans covered by FDIC loss share agreements declined 19.6% in 2015 and are expected to continue to decline as those loans continue to pay down.

The increase in total deposits at December 31, 2015 compared to December 31, 2014 was primarily due to increases in checking, money market and savings accounts, which increased in total by $236.5 million, or 12.6%, during 2015.  Those increases were partially offset by decreases in time deposits, which declined a total of $121.1 million, or 14.7%, during 2015.  Time deposits are generally one of the Company's most expensive funding sources, and thus the shift from this category has reduced the Company's overall cost of funds.

On June 25, 2015, the Company redeemed $32 million (32,000 shares) of the outstanding Non-Cumulative Perpetual Preferred Stock, Series B ("SBLF Stock") that had been issued to the United States Secretary of the Treasury in September 2011 related to the Company's participation in the Small Business Lending Fund.  On October 16, 2015, the remaining $31.5 million of SBLF Stock was redeemed, which ended the Company's participation in the Small Business Lending Fund.

The Company remains well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at December 31, 2015 of 14.44% compared to the 10.00% minimum to be considered well-capitalized.  The Company's tangible common equity to tangible assets ratio was 8.13% at December 31, 2015, an increase of 23 basis points from a year earlier.

Comments of the President and Other Business Matters

Richard H. Moore, President and CEO of First Bancorp, commented on today's report, "2015 was an excellent year for First Bancorp.  Ongoing growth initiatives helped drive strong loan and deposit growth, while the core net interest margin remained steady and nonperforming assets continued to decline. We thank our customers for the opportunity to be of service."

The following is a list of business development and other miscellaneous matters affecting the Company:

• On January 1, 2016, the Company completed the previously announced acquisition of Bankingport, Inc., an insurance agency based in Sanford, North Carolina. This acquisition provided the Company the opportunity to enhance its product offerings, as well as expand its insurance agency operations into Sanford, a significant banking market for the Company.
       
• On December 15, 2015, the Company announced a quarterly cash dividend of $0.08 per share payable on January 25, 2016 to shareholders of record on December 31, 2015. This is the same dividend rate as the Company declared in the fourth quarter of 2014.

Note Regarding Components of Earnings

The Company's results of operations are significantly affected by the on-going accounting for two FDIC-assisted failed bank acquisitions.  In the discussion above, the term "covered" is used to describe assets included as part of FDIC loss share agreements, which generally result in the FDIC reimbursing the Company for 80% of losses incurred on those assets.  The term "non-covered" refers to the Company's legacy assets, which are not included in any type of loss share arrangement.

For covered loans that deteriorate in terms of repayment expectations, the Company records immediate allowances through the provision for loan losses.  For covered loans that experience favorable changes in credit quality compared to what was expected at the acquisition date, including loans that pay off, the Company records positive adjustments to interest income over the life of the respective loan – also referred to as loan discount accretion.  For covered foreclosed properties that are sold at gains or losses or that are written down to lower values, the Company records the gains/losses within noninterest income. 

The adjustments discussed above are recorded within the income statement line items noted without consideration of the FDIC loss share agreements.  Because favorable changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those expectations.  The net increase or decrease in the indemnification asset is reflected within noninterest income.

The adjustments noted above can result in volatility within individual income statement line items.  Because of the FDIC loss share agreements and the associated indemnification asset, pretax income resulting from amounts recorded as provisions for loan losses on covered loans, discount accretion, and losses from covered foreclosed properties is generally only impacted by 20% of these amounts due to the corresponding adjustments made to the indemnification asset.

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First Bancorp is a bank holding company headquartered in Southern Pines, North Carolina with total assets of approximately $3.4 billion.  Its principal activity is the ownership and operation of First Bank, a state-chartered community bank that operates 88 branches, with 75 branches operating in North Carolina, 6 branches in South Carolina (Cheraw, Dillon, Florence, and Latta), and 7 branches in Virginia (Abingdon, Blacksburg, Christiansburg, Fort Chiswell, Radford, Salem and Wytheville), where First Bank does business as First Bank of Virginia. First Bank also has loan production offices in Charlotte, North Carolina and Greenville, North Carolina. First Bancorp's common stock is traded on the NASDAQ Global Select Market under the symbol "FBNC."

Please visit our website at www.LocalFirstBank.com.

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties.  Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgments of the Company and its management about future events.  Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, the Company's level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions.  For additional information about the factors that could affect the matters discussed in this paragraph, see the "Risk Factors" section of the Company's most recent annual report on Form 10-K available at www.sec.gov.  Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise forward-looking statements.  The Company is also not responsible for changes made to the press release by wire services, internet services or other media.

SOURCE First Bancorp