First Bancorp — Q3 2017 Form 10-Q
Business context and reporting period. First Bancorp is a North Carolina bank holding company. This unaudited filing covers the quarter and nine months ended September 30, 2017. Comparisons are significantly affected by the March 2017 acquisition of Carolina Bank; the October 1, 2017 acquisition of ASB Bancorp occurred after quarter-end and is not included in these results.
Financial performance and condition
Unless stated otherwise, dollar amounts are in millions.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $41.6 | $30.4 | $115.9 | $92.1 |
| Noninterest income | $12.4 | $5.2 | $34.0 | $16.1 |
| Noninterest expense | $34.4 | $27.7 | $101.5 | $78.6 |
| Net income | $13.1 | $4.7 | $31.8 | $19.2 |
| Diluted EPS | $0.53 | $0.23 | $1.33 | $0.93 |
- Q3 tax-equivalent net interest margin was 4.16%, up from 3.93%; the nine-month margin was 4.11%, versus 4.07%. Management attributed improvement to higher asset yields and acquired-loan discount accretion.
- At September 30, assets were $4.59 billion, loans $3.43 billion, deposits $3.65 billion, and shareholders’ equity $512.5 million. Compared with September 2016, assets grew 29.8%, loans 29.4%, and deposits 25.4%, with the acquisition contributing materially.
- For the first nine months, management reported organic loan growth of $221.5 million (10.9% annualized) and organic deposit growth of $118.5 million (5.4% annualized).
- Cash and cash equivalents were $408.8 million. Nine-month operating cash flow was negative $9.9 million, compared with positive $31.7 million a year earlier; investing cash outflow was $107.7 million and financing cash inflow was $220.4 million. Mortgage and SBA loan origination and sale activity affects operating cash flow.
- Borrowings were $397.5 million, up from $236.4 million at September 2016. Brokered deposits were $215.6 million, up from $147.4 million a year earlier. The company reported $427 million of unused, available credit lines and liquid assets equal to 18.1% of deposits and borrowings, down from 19.6% a year earlier.
- Total risk-based capital was 12.44% (versus 13.49% a year earlier); the company said it remained well-capitalized. Tangible common equity to tangible assets was 7.95%, versus 8.03% a year earlier.
Changes, outlook, risks, and unusual items
- Net income and EPS increased substantially, but the comparison includes two unusual Q3 2016 items: $5.7 million of FDIC indemnification asset expense upon termination of loss-share agreements, partly offset by a $1.4 million branch-exchange gain. Management estimated these items reduced Q3 2016 diluted EPS by a net approximately $0.17.
- Carolina Bank added approximately $497.5 million of loans and $585.4 million of deposits at acquisition. The acquisition also increased goodwill and intangible assets and contributed to higher personnel, merger, and amortization expenses. Merger and acquisition costs were $4.8 million for the first nine months of 2017.
- Management said it expects continued loan growth for the remainder of 2017. Based on modeling that assumes one further rate increase in 2017, it expects net interest margin to remain fairly stable over the next twelve months; excess cash and securities yields are expected to rise, loan yields to remain stable, and deposit rates to rise gradually. These are forward-looking expectations, not guarantees.
- Credit indicators improved: nonperforming assets were $53.0 million, or 1.16% of assets, versus $70.2 million, or 1.98%, a year earlier. The allowance was $24.6 million, 0.72% of loans; the filing notes no allowance was recorded at acquisition for Carolina Bank loans because they were booked at fair value. The company reported $16.9 million of unaccreted loan discount, which can absorb losses loan-by-loan but whose income recognition is uncertain.
- Management identified dependence on estimates for loan-loss reserves, acquired-loan fair values and discount accretion, and intangible assets. It expects adoption of the CECL credit-loss standard to increase the recorded allowance, though the amount is not provided. Regulatory reviews may require reserve or asset-value adjustments.
- Interest-rate exposure is mixed: the company reported more interest-sensitive liabilities than earning assets repricing within one year, while describing itself as asset-sensitive in the shorter term. A relatively flat yield curve, competition for loans, and rising deposit costs could pressure margins. Management also cautioned that acquired-loan discount accretion can be volatile.
- ASB Bancorp was acquired October 1 for $17.9 million cash and 4.9 million First Bancorp shares. Fair-value measurements were incomplete when the filing was issued. The filing gives differing approximate asset totals for ASB in separate passages, so a single clear figure is not provided.
Important facts for investors to verify
- How much of earnings and margin growth is recurring versus acquisition-related, purchase-accounting accretion, and other noncore items.
- Integration progress and costs for Carolina Bank and ASB Bancorp, including ASB’s final purchase-price allocation and planned systems conversion.
- Loan quality, acquired-loan performance and discount accretion, and whether the allowance remains adequate as the loan portfolio grows.
- Funding mix and liquidity, particularly continued reliance on brokered deposits and borrowings relative to organic deposit growth.
- Actual sensitivity of net interest income and deposit costs to rate changes, given the filing’s stated repricing mismatch and yield-curve risks.