FIRST BANCORP quarterly report, Q2 FY2015

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First Bancorp — Form 10-Q Summary

Business context and reporting period

First Bancorp, a North Carolina bank holding company, reported unaudited results for the quarter and six months ended June 30, 2015. Comparisons below are to the corresponding 2014 periods unless otherwise noted. Amounts are in U.S. dollars; financial statement figures are generally presented in millions.

Financial and operating results

  • Earnings: Second-quarter net income was $6.2 million and net income available to common shareholders was $6.0 million, or $0.30 per diluted share, versus $6.6 million, $6.4 million, and $0.32, respectively. For the first half, common earnings were $12.8 million, or $0.63 per diluted share, versus $11.9 million, or $0.59.
  • Net interest income and margin: Q2 net interest income was $29.6 million, down 12.4%; first-half net interest income was $59.3 million, down 14.5%. Tax-equivalent net interest margin was 4.15% in Q2 and 4.17% for the first half, compared with 4.65% and 4.89%. Management attributed much of the decline to lower accretion of acquired-loan discounts: $1.1 million in Q2 and $2.7 million in the first half, versus $4.8 million and $11.2 million.
  • Other income and expenses: Noninterest income was $5.0 million in Q2, roughly unchanged, and $9.5 million for the first half, versus $5.3 million. Core noninterest income declined 5.0% in Q2 and 4.5% year to date, mainly because deposit service charges fell. Noninterest expense was $24.3 million in Q2 and $48.0 million in the first half, down modestly from 2014.
  • Credit costs and asset quality: Total loan-loss provision was $0.8 million in Q2 and $0.7 million for the first half, versus $3.7 million and $7.2 million. Nonperforming assets were $99.4 million, or 3.09% of assets, at June 30, down from $114.0 million and 3.54% at year-end 2014. The allowance was $32.1 million, 1.33% of total loans, versus $40.6 million and 1.70% at year-end. First-half net charge-offs were $9.2 million.
  • Balance sheet and funding: Total assets were $3.21 billion; loans were $2.41 billion; deposits were $2.65 billion. Versus June 2014, assets declined 1.7%, loans 0.9%, and deposits 3.7%. Cash and cash equivalents were $178.4 million, down from $407.3 million a year earlier. Investment securities increased to about $379.7 million from $171.9 million. Borrowings were $176.4 million, up $60 million from year-end 2014.
  • Cash flow: First-half cash provided by operations was $17.5 million, versus $25.7 million. Investing activities used $73.7 million, while financing activities used $18.4 million. Cash and cash equivalents decreased $74.7 million during the period.
  • Capital and liquidity: The company reported a 16.14% total risk-based capital ratio, an 11.29% Tier 1 leverage ratio, and an 8.24% tangible common equity-to-tangible assets ratio. Liquid assets were 19.7% of deposits and borrowings. Available unused credit lines were $416 million; the FHLB line was approximately $562 million, with $130 million outstanding.

Material changes versus comparable periods

  • Earnings per common share rose for the first half but declined in Q2. Lower provision expense supported the first-half improvement, while reduced acquired-loan discount accretion weighed on Q2 earnings and margins.
  • Asset quality improved from year-end: total nonperforming assets fell by $14.6 million. Covered nonperforming assets also declined, reflecting loan resolution and property sales. Non-covered loan growth was $30.4 million in the first half, partially offset by declines in covered loans.
  • Funding shifted away from time deposits and brokered deposits toward transaction accounts. Management said this mix shift lowered funding costs; the reported cost of interest-bearing liabilities fell to 0.31% for the first half from 0.37%.
  • On June 25, 2015, the company redeemed $32 million of Series B preferred stock. $31.5 million remained outstanding at quarter-end.

Outlook, commentary, risks, and unusual items

  • Management projected some net interest margin compression for the remainder of 2015, citing continued pressure on loan yields and limited scope to reduce deposit rates further. It expects acquired-loan discount accretion to continue declining; the remaining discount on accruing loans was $15.1 million at June 30.
  • Management said near-term loan growth initiatives were underway, but noted competition, a slow recovery in some markets, and tighter loan-process changes had constrained growth. It described credit quality and economic trends as improving, while acknowledging nonperforming assets and losses remained elevated relative to historical levels.
  • Interest-rate exposure is material: the company’s one-year repricing analysis showed about $897 million more interest-bearing liabilities than earning assets. Management said near-term effects depend on repricing lags, deposit behavior, and the shape of the yield curve.
  • FDIC loss-share arrangements affect results and reduce the company’s share of certain covered-asset gains and losses; one agreement expired in July 2014, shifting related assets and future losses to the non-covered portfolio. A negotiated FDIC claim settlement in Q2 resulted in a $406,000 write-off.
  • The SEC resolved its investigation on June 1, 2015 with a cease-and-desist order against the company and two former executives. The SEC found disclosure and internal-control violations related to 2009–2011 related-party transactions and imposed a $275,000 civil penalty. Management reported current disclosure controls were effective and no material change in internal control during the period.
  • The company said it intended, subject to regulatory approval, to redeem the remaining Series B preferred stock before its dividend rate rises from 1% to 9% in March 2016. Results are not necessarily indicative of full-year performance; the filing provides no specific earnings guidance.

Most important facts for investors to verify

  • Whether margin pressure and the declining contribution from acquired-loan discount accretion are reflected in subsequent results.
  • Whether nonperforming assets, charge-offs, and the allowance remain consistent with management’s credit-quality assessment, especially for non-covered loans.
  • Whether loan and deposit trends support stable funding and planned loan growth, and how the $60 million borrowing increase affects funding costs.
  • Capital and liquidity levels after the Series B redemption, including any regulatory approval or timing for redeeming the remaining preferred stock.
  • Progress in addressing the SEC-identified disclosure and internal-control deficiencies, and any further consequences related to the order.