FIRST BANCORP quarterly report, Q3 FY2013

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First Bancorp — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. First Bancorp is a North Carolina-based community banking company. Results include assets acquired in FDIC-assisted transactions, some of which are covered by FDIC loss-share agreements.

Financial performance and condition

  • Third-quarter earnings: Net income was $6.3 million, versus $4.4 million in Q3 2012. Net income available to common shareholders was $6.1 million, or $0.30 diluted EPS, versus $3.7 million, or $0.22.
  • Nine-month earnings: Net income was $15.0 million, versus $2.5 million in 2012. Net income available to common shareholders was $14.3 million, or $0.71 diluted EPS, versus $0.3 million, or $0.01.
  • Interest income and margin: Q3 net interest income was $33.7 million, down 2.2% year over year; nine-month net interest income was $101.3 million, up 1.7%. Tax-equivalent net interest margin was 4.84% in Q3 versus 4.86% a year earlier, and 4.88% for nine months versus 4.71%. Q3 margin declined from 5.10% in Q2 2013, largely reflecting lower acquired-loan discount accretion.
  • Other income and expenses: Noninterest income was $5.6 million in Q3 and $17.2 million for nine months, compared with $2.8 million and $9.9 million, respectively, in 2012. Core noninterest income increased 10.2% in Q3 and 12.2% year to date. Noninterest expense was $23.7 million in Q3 and $72.7 million for nine months, versus $23.7 million and $71.5 million.
  • Credit costs: Loan-loss provision was $5.0 million in Q3 and $21.7 million for nine months, down from $7.1 million and $35.1 million. The allowance was $47.7 million, or 1.95% of loans, at September 30.
  • Cash flow: Nine-month operating cash flow was $40.5 million; investing cash flow was $46.6 million; financing cash flow was negative $143.5 million. Cash and cash equivalents declined $56.4 million to $185.1 million.
  • Balance sheet and funding: Total assets were $3.17 billion, down 4.5% from September 2012. Loans were $2.44 billion, approximately unchanged year over year; deposits were $2.74 billion, down 3.3%. Borrowings were $46.4 million, versus $111.4 million a year earlier. Noninterest-bearing and other transaction deposits grew while time deposits declined.
  • Capital and liquidity: Total risk-based capital was 16.61%, Tier 1 risk-based capital 15.35%, and Tier 1 leverage 10.96%. Tangible common equity to tangible assets was 7.19%, up from 6.46% a year earlier. Unused credit lines were $317 million; the company reported no outstanding draws on its listed FHLB, correspondent-bank, or Federal Reserve lines.
  • Dividend: The company declared a quarterly common dividend of $0.08 per share. No common shares were repurchased during the first nine months.

Material changes and management commentary

  • Management attributed higher year-to-date earnings primarily to lower loan-loss provisions and lower foreclosed-property losses and write-downs. Comparisons also reflect unusually high 2012 credit costs.
  • Non-covered loans grew internally by $105 million, or 5.0%, in the first nine months; total loans increased 2.8% from year-end, including $16 million from a branch acquisition. Covered loans continued to run off.
  • The March 2013 purchase of two Four Oaks Bank branches added approximately $57 million of deposits and $16 million of loans.
  • Nonperforming assets totaled $166.4 million, down from $202.4 million at December 2012 and $259.9 million at September 2012. However, total nonperforming loans rose to 5.00% of total loans from 4.50% at year-end; non-covered nonaccrual loans increased to $40.7 million from $33.0 million at year-end, and covered nonaccrual loans increased to $47.2 million from $33.5 million.
  • Foreclosed real estate fell to $44.3 million from $73.6 million at year-end, reflecting property sales. The company said it had written down non-covered foreclosed properties by $10.6 million in Q4 2012 to accelerate dispositions.
  • Management cited growth in transaction accounts and lower funding costs: Q3 total cost of funds was 0.37%, versus 0.57% in Q3 2012. It also reported continued loan demand, while noting competition constrained loan pricing.

Outlook, risks, and unusual items

  • Outlook: Management projected some net interest margin compression in Q4 2013, expecting loan yields to continue trending downward while many deposit rates were already near zero. The company expected to open loan production offices in Charlotte and Columbia, North Carolina, during Q4. No specific full-year earnings guidance was provided.
  • Credit and estimation risks: Management said the allowance was adequate but cautioned that economic or portfolio changes, revised estimates, or regulatory examinations could require additional reserves or foreclosed-property adjustments. The company continued to report elevated credit problems relative to historical levels. Construction/land development and commercial real estate were significant areas of charge-offs.
  • FDIC-related volatility: The FDIC indemnification asset declined to $64.9 million from $102.6 million at year-end. Covered-asset provisions, discount accretion, property gains or losses, and indemnification adjustments can cause volatility in reported income; loss-share protection generally covers 80% of eligible losses. One Cooperative Bank non-single-family loss-share agreement expires in June 2014.
  • Interest-rate risk: Management described short-term sensitivity to rising rates but said the 12-month impact was less clear. It also noted that a flatter yield curve can pressure margins and that higher market rates had not yet translated into stronger loan yields because of competition.
  • Unusual items: Q3 income tax expense included an incremental $0.5 million charge to reduce the deferred tax asset after North Carolina tax-rate changes; the Q3 effective tax rate was 40.5%. Nine-month other operating expense included approximately $1.6 million of severance expense, including costs related to the former CEO’s departure. Acquired-loan discount accretion contributed $4.3 million to Q3 net interest income and $14.6 million year to date.
  • The company reported no material legal proceedings, no derivative activity, and no material change in internal control over financial reporting. Management concluded disclosure controls were effective.

Important facts for investors to verify

  • Whether the rise in nonaccrual loans and nonperforming-loan ratios signals renewed credit deterioration, particularly in covered credits and real estate-related lending.
  • How much future earnings depend on acquired-loan discount accretion, and the expected effects of loss-share agreement expirations and FDIC indemnification re-estimates.
  • Whether loan growth and transaction-deposit growth can continue as time deposits run off, and whether liquidity remains adequate as liquid assets decline.
  • Whether management’s Q4 margin-compression expectation and competitive loan-pricing pressures affect subsequent results.
  • The sustainability of reported earnings after considering lower provisions, property-sale results, tax adjustments, severance costs, and other acquisition-related accounting effects.