First Bancorp — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. First Bancorp is a North Carolina bank holding company. Unless noted otherwise, amounts below are in millions; the filing’s financial statements are unaudited.
Financial results and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest income | $33.4 | $36.3 | $107.0 | $109.9 |
| Net interest income | $31.3 | $33.7 | $100.7 | $101.3 |
| Noninterest income | $4.6 | $5.6 | $9.9 | $17.2 |
| Net interest income plus noninterest income | $36.0 | $39.3 | $110.6 | $118.5 |
| Provision for loan losses | $1.5 | $5.0 | $8.7 | $21.7 |
| Noninterest expense | $25.9 | $23.7 | $74.3 | $72.7 |
| Net income | $5.6 | $6.3 | $17.9 | $15.0 |
| Net income available to common shareholders | $5.4 | $6.1 | $17.3 | $14.3 |
| Diluted EPS | $0.27 | $0.30 | $0.85 | $0.71 |
| Net interest margin, tax-equivalent | 4.30% | 4.84% | 4.69% | 4.88% |
- Q3 common earnings fell 12.3% year over year; nine-month common earnings rose 20.3%, primarily because loan-loss provisions were substantially lower.
- Core noninterest income increased 3.2% in Q3 to $7.8 million and 8.8% for the first nine months to $23.1 million. Reported noninterest income was lower, reflecting volatile foreclosed-property and FDIC-indemnification items.
- At September 30, total assets were $3.196 billion; total loans were $2.426 billion, including $2.293 billion non-covered loans; deposits were $2.679 billion; borrowings were $116.4 million; and shareholders’ equity was $384.8 million.
- Cash and cash equivalents were $336.5 million, up from $223.3 million at December 31, 2013. For the first nine months, operating cash flow was $36.9 million, investing cash flow was $83.7 million, and financing cash flow was negative $7.4 million.
- Total allowance for loan losses was $44.1 million, or 1.82% of loans. Nonperforming assets were $116.8 million, or 3.66% of assets; nonperforming loans were 4.20% of total loans. The filing reports no loans more than 90 days past due and still accruing.
- Regulatory capital remained above stated minimums: total risk-based capital was 17.27%, Tier 1 risk-based capital 16.01%, and Tier 1 leverage 11.39%. The company reported a tangible common equity to tangible assets ratio of 7.86%.
Material changes versus comparable periods
- Q3 net interest income decreased 7.1% and the tax-equivalent net interest margin fell 54 basis points year over year. Management attributed margin pressure mainly to lower acquired-loan discount accretion and lower asset yields; lower funding costs provided some offset.
- Loan-loss provision declined to $8.7 million for the first nine months from $21.7 million a year earlier. Net charge-offs for that period were $13.1 million versus $20.4 million.
- Total nonperforming assets declined to $116.8 million from $166.4 million a year earlier. However, non-covered nonperforming assets increased to $96.8 million from $83.5 million, partly because assets lost FDIC loss-share protection and were reclassified.
- Deposits decreased 2.3% year over year, chiefly from lower time deposits; noninterest-bearing checking increased. Borrowings rose to $116.4 million from $46.4 million a year earlier, including $70 million of new borrowings in Q1 2014.
- Total loans declined 0.7% year over year. Non-covered loans grew 3.5%, including loans transferred from covered status, while covered loans declined 41.3%.
Outlook, risks, contingencies, and unusual items
- Outlook: No earnings or revenue guidance is provided. Management expected some net interest margin compression for the remainder of 2014, with loan yields continuing to trend down and limited scope for further deposit-cost reductions. It expected covered loans to keep declining and anticipated non-covered loan growth, while citing strong competition for high-quality loans.
- FDIC loss-share expiration: On July 1, 2014, coverage expired for Cooperative Bank non-single-family assets. First Bancorp assumed future losses on the transferred portfolio, including $39.7 million of loans and $3.0 million of foreclosed property; $9.7 million of the loans were nonaccrual. Management did not expect losses to be materially above related allowances. Three other loss-share agreements remained in place; the next scheduled expiration was April 1, 2016.
- Branch consolidation and property charges: The company announced plans to close and consolidate ten branches, recording $0.9 million of related expense in the first nine months. Q3 also included $0.8 million of non-covered foreclosed-property losses. Nine closures were planned for December 2014, subject to regulatory approval.
- Interest-rate and credit risks: Management identified sensitivity to market rates, competition, asset yields, acquired-loan discount accretion, and economic conditions. It stated that asset quality remained elevated relative to historical levels, despite improvement in some measures. Allowance adequacy depends on estimates and could require future adjustments.
- Preferred stock: The Series B preferred dividend rate was 1% and is scheduled to rise to 9% after March 2016 unless the shares are redeemed, subject to regulatory approval.
- The company reported no legal proceedings expected to have a material effect, no significant derivative activity, and no material change in internal control over financial reporting. Management stated that liquidity sources were adequate for foreseeable operating needs; unused available credit lines totaled $303 million at quarter-end.
Most important facts for investors to verify
- Whether the deterioration in non-covered nonperforming assets persists after separating the effect of the FDIC coverage reclassification.
- Future credit losses and allowance adequacy, particularly on the transferred portfolio now bearing no FDIC loss protection.
- Whether net interest margin and acquired-loan discount accretion continue to decline, and the resulting impact on earnings.
- Deposit trends, reliance on borrowings, and continued availability of the disclosed credit lines.
- Execution and costs of the ten-branch consolidation, and the eventual Series B preferred dividend step-up or redemption decision.