First Bancorp — Q1 2016 Form 10-Q
Business context and period: First Bancorp and subsidiaries, a North Carolina-based banking company, reported unaudited results for the three months ended March 31, 2016. Unless noted, dollar figures below are in millions. The company cautions that quarterly results are not necessarily indicative of full-year results.
Key financial results and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / change |
|---|---|---|
| Net interest income | $30.2 | Up 1.7% from $29.7 in Q1 2015 |
| Net interest margin, tax-equivalent | 4.07% | 4.19% in Q1 2015 |
| Net income | $6.84 | $6.99 in Q1 2015 |
| Net income available to common shareholders | $6.78 | $6.77 in Q1 2015 |
| Diluted earnings per common share | $0.33 | $0.33 in Q1 2015 |
| Total assets | $3,383 | Up 5.1% year over year |
| Total loans | $2,539 | Up 6.0% year over year |
| Total deposits | $2,827 | Up 4.9% year over year |
| Borrowings | $186 | $116 at March 31, 2015; unchanged from December 31, 2015 |
| Allowance for loan losses | $26.6; 1.05% of loans | $36.0; 1.50% at March 31, 2015 |
| Nonperforming assets | $82.3; 2.43% of assets | $104.9; 3.26% at March 31, 2015 |
| Operating cash flow | $19.9 | $3.1 in Q1 2015 |
| Cash and cash equivalents | $201.6 | Down $65.7 from year-end 2015 |
Q1 provision for loan losses was $0.3, compared with a $0.2 reversal in Q1 2015. Noninterest income was $5.0 versus $4.5; noninterest expense rose 4.5% to $24.8. Common dividends declared were $0.08 per share, unchanged year over year.
Material changes versus Q1 2015
- Loan growth and higher investment-security yields lifted net interest income, but the margin fell 12 basis points, mainly due to lower loan yields and reduced acquired-loan discount accretion ($1.1 versus $1.6).
- Non-covered loan provision increased to $1.6 from $0.1. This reflected loan growth and the company’s expectation that provision expense would track more closely with growth, charge-offs, and credit quality as unusually high prior-recession loss periods age out of its allowance model.
- Nonperforming assets declined about 21% year over year. Net charge-offs were $2.2, down from $4.5; non-covered nonperforming assets fell to $71.6 from $90.4.
- Core noninterest income increased 2.2% to $7.3, including higher insurance commissions following the Bankingport acquisition. Presold-mortgage fees declined to $0.4 from $0.8 amid fewer originations.
- Expenses rose mainly due to higher employee health claims, card fraud losses, and merger-related legal costs. The effective tax rate decreased to 32.7% from 34.6%.
- Assets, loans, and deposits grew year over year. Transaction accounts increased while time deposits declined, improving funding mix; increased borrowings supported loan growth.
Outlook, risks and unusual items
- Outlook: Management expects continued growth in non-covered loans and continued runoff in covered loans. Based on its interest-rate model assuming no rate changes, it expects further net interest margin compression for the rest of 2016, citing pressure on loan yields and limited scope for deposit-rate reductions. No specific full-year earnings guidance is provided.
- FDIC loss-share expiration: A Bank of Asheville non-single-family loss-share agreement expired April 1, 2016. First Bancorp assumed future losses on the transferred portfolio, which had $17.7 of loans and $1.2 of foreclosed property; $2.8 of those loans were nonaccrual. Management said it did not expect losses materially above related allowances. Two other loss-share agreements remain, the next expiring July 1, 2019.
- Interest-rate and credit risks: The company describes the yield curve as relatively flat and reports ongoing pressure on loan yields and margins. It also notes elevated nonperforming and classified assets versus historical levels, judgment-sensitive allowance estimates, and possible regulatory adjustments. Interest-rate changes and acquired-loan discount accretion may make results volatile.
- Liquidity and capital: Liquid assets were 19.8% of deposits and borrowings, down from 21.1% a year earlier. Available unused credit lines totaled $550. The company said liquidity remained adequate. Total risk-based capital was 14.45%, above the 8.00% stated minimum; tangible common equity to tangible assets was 8.24%.
- Transactions: Bankingport, an insurance agency, was acquired January 1 for $2.2, including cash and issued shares; $1.7 of goodwill was recorded. A branch-and-loan exchange with First Community Bank was announced and, subject to approvals and closing conditions, was expected in Q3 2016.
- The company reported no material pending legal proceedings, no material change in internal controls, and no material effect from accounting standards adopted in the quarter.
Most important facts for investors to verify
- Whether net interest margin and loan yields continue to weaken, and how actual results compare with management’s stated margin outlook.
- Credit performance and reserve adequacy, especially after the FDIC loss-share protection ended for the $17.7 loan portfolio; track nonaccruals, charge-offs, and allowance coverage.
- Whether loan growth can be funded without materially increasing borrowing costs or weakening liquidity and capital ratios.
- The realized contribution and integration costs of Bankingport, and completion and financial effects of the proposed branch exchange.
- Cash-flow composition: investing cash use was $99.6, including $99.9 of available-for-sale securities purchases, while cash balances fell during the quarter.