First Bancorp (FBNC) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. First Bancorp is a North Carolina bank holding company. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $53.8 | $51.8 | $161.5 | $153.6 |
| Net income | $25.0 | $22.0 | $71.2 | $65.4 |
| Diluted EPS | $0.84 | $0.74 | $2.39 | $2.21 |
| Noninterest income | $15.6 | $15.2 | $46.2 | $46.9 |
| Noninterest expense | $38.9 | $39.0 | $118.6 | $121.2 |
- Net interest margin, on a tax-equivalent basis, was 3.95% in Q3 versus 4.03% a year earlier; nine-month margin was 4.02% versus 4.09%. Management attributed the decline to lower acquired-loan discount accretion and funding costs rising faster than asset yields.
- Q3 provision for loan losses was a $1.1 million reversal; the nine-month provision was a $0.9 million reversal. Effective tax rates were 20.8% for Q3 and 21.0% for nine months.
- Nine-month operating cash flow was $33.4 million, investing cash flow was negative $268.4 million, and financing cash flow was $89.6 million. Cash and cash equivalents fell $145.4 million to $317.5 million, principally alongside substantial securities purchases.
Financial position and asset quality
- At September 30, 2019, assets were $6.07 billion, loans were $4.40 billion, deposits were $4.88 billion, borrowings were $300.7 million, and shareholders’ equity was $835.0 million. Since December 31, 2018, assets increased 3.5%, loans 3.5%, and deposits 4.6%; borrowings declined $106.0 million.
- Available-for-sale securities grew to $705.2 million from $501.4 million at year-end, while cash and cash equivalents declined from $462.9 million. Liquid assets as a share of deposits and borrowings increased to 21.5% from 21.0%. Unused and available credit lines were $773 million.
- Nonperforming assets declined to $33.9 million from $43.4 million at year-end; nonperforming assets were 0.56% of total assets. The allowance for loan losses was $19.3 million, or 0.44% of loans, compared with 0.50% at year-end.
- Total risk-based capital was 14.88%, versus 13.97% at year-end; Common Equity Tier 1 was 13.27%. Management said the company remained well-capitalized.
Material changes, outlook, and risks
- Year-to-date net income rose about 8.8%; diluted EPS increased from $2.21 to $2.39. Net interest income growth reflected larger earning-asset balances, while margin compression reflected rising deposit costs and lower acquired-loan accretion.
- Retail deposit growth supported a $112 million, or 46.8%, reduction in brokered deposits and the $106 million reduction in borrowings. The company invested cash in fixed-rate securities to improve yields and reduce exposure to falling rates.
- Management expected continued loan growth through the remainder of 2019. It noted that Federal Reserve rate cuts and competitive deposit pricing were expected to continue pressuring net interest margin; no specific earnings or margin guidance was provided.
- Management stated it could continue share repurchases, subject to market conditions, up to $15 million of remaining authorization during the final quarter of 2019. It repurchased $10 million of shares in the first nine months and declared a quarterly dividend of $0.12 per share.
- CECL was scheduled for adoption in 2020. The company could not reasonably estimate the effect but expected adoption to significantly increase the allowance for loan losses.
- Key risks include interest-rate and yield-curve changes, deposit competition, economic conditions and credit losses, uncertainty in acquired-loan discount accretion, and acquisition integration. The filing reported no material pending legal proceedings and no material change in contractual obligations or commitments.
- The company adopted the lease standard in 2019, recognizing approximately $19.4 million of right-of-use assets and lease liabilities at adoption; management said the adoption did not materially affect income or cash flows.
Important facts for investors to verify
- Whether loan growth and retail deposit growth continue while brokered deposits and borrowings decline.
- Whether deposit costs ease enough to offset the effect of rate cuts and sustain net interest margin.
- Credit trends, including nonperforming assets, charge-offs, and the adequacy of the allowance; confirm the expected CECL impact as implementation progresses.
- The sustainability of fee income, particularly SBA consulting fees and loan-sale gains, which were lower year over year, and mortgage-related fees, which increased.
- Execution of remaining buyback authorization and the declared dividend, alongside capital and liquidity levels.