First Bancorp — Q1 2015 Form 10-Q
Business context and reporting period: First Bancorp is a North Carolina-based bank holding company. This unaudited report covers the three months ended March 31, 2015; income and cash-flow comparisons are with Q1 2014, and balance-sheet comparisons are primarily with March 31, 2014 and December 31, 2014. Unless noted, dollar figures below are in millions.
Financial results and position
- Earnings: Net income was $7.0 million, up from $5.7 million; net income available to common shareholders was $6.8 million versus $5.5 million. Diluted EPS increased to $0.33 from $0.27. Management attributed the improvement mainly to lower loan-loss provisions.
- Interest income and margin: Net interest income fell 16.4% to $29.7 million from $35.5 million. Tax-equivalent net interest margin declined to 4.19% from 5.13% in Q1 2014 and 4.25% in Q4 2014. Loan discount accretion from failed-bank acquisitions was $1.6 million versus $6.4 million a year earlier.
- Credit costs and fee income: Total loan-loss provision was a net reversal of $0.2 million, compared with a $3.6 million provision in Q1 2014. Reported noninterest income was $4.5 million versus $0.3 million, affected by FDIC indemnification and foreclosed-property items; core noninterest income declined 3.9% to $7.2 million. Noninterest expense was $23.7 million, up slightly from $23.6 million.
- Cash flow: Operating activities provided $3.1 million, down from $14.2 million. Investing activities used $7.6 million; financing activities used $4.1 million. Cash and cash equivalents declined $8.6 million during the quarter to $244.5 million.
- Balance sheet and funding: Total assets were $3.220 billion, including loans of $2.395 billion, deposits of $2.694 billion, and shareholders’ equity of $393.2 million. Assets, loans, and deposits were down 2.9%, 2.1%, and 3.3%, respectively, year over year. Borrowings were $116.4 million, unchanged from year-end and down from $136.4 million a year earlier.
- Credit quality: Total nonperforming assets were $104.9 million, down from $141.1 million a year earlier and $114.0 million at year-end. Nonperforming assets were 3.26% of total assets, versus 4.26% a year earlier. Non-covered nonperforming assets were $90.4 million, higher than $82.2 million a year earlier; management noted that some assets shifted from FDIC-covered to non-covered status in July 2014. The allowance for loan losses was $36.0 million, or 1.50% of loans, compared with $48.1 million and 1.97% a year earlier. Net charge-offs were $4.5 million; the annualized ratio to average loans was 0.76%, versus 0.65%.
- Capital and liquidity: Total risk-based capital was 17.61% and the Tier 1 leverage ratio was 12.17%; management reported the company remained well-capitalized. Tangible common equity to tangible assets was 8.08%, up from 7.30% a year earlier. Available unused credit lines totaled $416 million. Liquid assets were 21.1% of deposits and borrowings, unchanged year over year. The quarterly common dividend was $0.08 per share.
Material changes versus comparable periods
- Earnings and diluted EPS improved despite materially lower net interest income, principally because the provision for loan losses fell sharply and reported noninterest income included less severe FDIC-related and covered-property losses than in Q1 2014.
- Margin pressure reflects lower asset yields and declining purchase-accounting accretion. Deposit costs also fell: total cost of funds was 0.26% versus 0.31% a year earlier.
- Core fee income weakened, mainly as deposit service charges fell to $2.9 million from $3.6 million. Mortgage fees and other service fees increased.
- Transaction deposits grew while time deposits and brokered deposits declined. Over the year, transaction-account balances increased 7.3% and average time deposits decreased 20.0%.
- Covered nonperforming assets continued to fall, to $14.5 million from $58.9 million a year earlier. Total loans were broadly flat during Q1, as modest non-covered loan growth was offset by run-off in covered loans.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific earnings or EPS guidance was provided. Management projected some net interest margin compression for the remainder of 2015, assuming no interest-rate changes, as loan yields were expected to continue trending down and many deposit rates were already near zero. It also expected acquisition-related loan discount accretion to continue declining.
- Credit and reserve risk: Management cited improving credit trends and anticipated that lower recent net charge-offs could support future provision levels, but cautioned that economic or portfolio changes, and regulatory examinations, could require significant allowance adjustments. Real estate lending represented about 90% of loans.
- FDIC loss-share matters: The FDIC denied $1.2 million of claims, disputing the company’s collection strategy. First Bancorp invoked arbitration and recorded no reserve for the disputed amount. A loss-share agreement covering certain non-single-family assets expired in July 2014, shifting related losses to the company.
- SEC Wells Notice: The SEC staff alleged failures to disclose certain related-party transactions from 2009–2011 and deficiencies in disclosure and internal controls. Management said settlement was more likely than not, expected a cease-and-desist order without admission and a penalty not expected to be material; no final settlement had been reached as of the filing. Separately, management concluded disclosure controls were effective at quarter-end.
- Preferred stock: The $63.5 million Series B preferred stock dividend rate was 1% and was scheduled to rise to 9% in March 2016. Management stated its intent, subject to regulatory approval, to redeem it before the increase; completion was not assured.
- Interest-rate exposure: Management described near-term sensitivity as asset-sensitive over less than six months, but noted greater interest-bearing liabilities than earning assets repricing within one year and a relatively flat yield curve. The filing warns that these exposures and acquisition-related accretion are uncertain and may affect results.
Important facts for investors to verify
- Whether net interest margin and acquisition-related discount accretion continue to decline, and how that affects earnings.
- Whether non-covered asset quality improves and whether the reduced allowance remains adequate given loan losses, nonperforming loans, and real-estate concentration.
- Resolution and potential financial impact of the SEC matter and the $1.2 million FDIC claim dispute.
- Actual loan and deposit growth, including the pace of covered-loan run-off and continued shift from time deposits to transaction accounts.
- Whether First Bancorp can redeem Series B preferred stock before its dividend rate rises to 9% in March 2016, subject to regulatory approval.