First Bancorp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. First Bancorp is a North Carolina bank holding company. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $54.4m | $51.2m | $107.8m | $101.7m |
| Net income | $23.9m | $22.7m | $46.1m | $43.4m |
| Diluted EPS | $0.80 | $0.77 | $1.55 | $1.46 |
| Noninterest income | $16.0m | $15.9m | $30.6m | $31.7m |
| Noninterest expense | $40.4m | $38.6m | $79.7m | $82.1m |
- Quarterly net income increased about 5%; diluted EPS increased 3.9%. First-half net income increased about 6%; diluted EPS increased 6.2%.
- Tax-equivalent net interest margin was 4.06% in Q2, versus 4.07% a year earlier; first-half margin was 4.06%, versus 4.12%. Lower accretion of acquired-loan discounts was a key factor. Net interest income grew as earning assets and loans expanded.
- Quarterly noninterest expense rose 4.7%, mainly on higher salaries. First-half expense fell 2.9%, primarily because merger and acquisition costs were lower than during the Asheville Savings Bank integration period in 2018.
- Effective tax rate was 21.2% for Q2 and 21.0% for the first half, compared with 22.1% in both 2018 periods; management cited a lower North Carolina corporate tax rate and, year to date, nondeductible merger expenses in 2018.
Financial position, cash flow and credit
- At June 30, 2019, assets were $6.012bn, loans $4.339bn, deposits $4.843bn, borrowings $301m, and shareholders’ equity $815m. Year over year, assets grew 5.1%, loans 4.6%, and deposits 6.4%; borrowings declined about $106m.
- Cash and cash equivalents were $339.5m, down from $560.1m a year earlier, while available-for-sale securities increased to $692.0m from $334.1m. Management said cash was shifted into fixed-rate securities to seek higher yields and reduce exposure to falling rates.
- Six-month operating cash flow was $24.7m, compared with cash used of $5.0m in 2018. Investing activities used $213.3m, including securities purchases; financing activities provided $65.2m. Cash and cash equivalents decreased $123.4m during the period.
- Liquidity: cash and securities were 20.1% of deposits and borrowings, versus 20.2% a year earlier. Unused available credit lines were $800m at June 30, 2019. Management considered liquidity adequate for foreseeable operating needs.
- Asset quality improved: nonperforming assets were $34.4m, or 0.57% of assets, versus $51.2m and 0.90% a year earlier. Nonperforming loans were 0.67% of loans. Allowance for loan losses was $20.8m, or 0.48% of loans; annualized first-half net charge-offs were 0.02% of average loans.
- Regulatory capital remained above stated minimums: total risk-based capital ratio 14.60%, CET1 12.94%, and Tier 1 leverage ratio 10.89%. Tangible common equity to tangible assets was 9.75%.
Changes, outlook and risks
- Management expected continued loan growth in 2019, citing expansion in higher-growth markets, experienced banker hiring, and SBA lending. Retail deposit growth supported reductions in brokered deposits and borrowings.
- Following the Federal Reserve’s July 31, 2019 rate cut, management expected at least one further cut in 2019 and projected a slight decline in net interest margin in the second half, as asset yields were expected to fall more than funding costs.
- Deposit pricing competition and a flat yield curve were pressuring margins. The company had more interest-bearing liabilities than earning assets subject to rate changes within one year, although management described the modeled position as slightly asset-sensitive over a one-to-two-year horizon.
- Management expected adoption of CECL, effective for the company beginning in 2020, to significantly increase the allowance for loan losses, but said the effect could not yet be reasonably estimated. Implementation and model work were ongoing.
- Other notable items: the company adopted lease accounting in 2019, recognizing roughly $19.4m of right-of-use assets and lease liabilities, with no material income-statement or cash-flow impact. It issued 78,353 shares valued at $3.1m for an acquisition earn-out, repurchased about 182,000 shares for $6.5m in the first half, and declared a quarterly dividend of $0.12 per share.
- The filing reported no pending legal proceedings management considered material and no material change in contractual obligations. Forward-looking results remain subject to interest rates, economic conditions, customer strategies, acquisition integration, and regulatory actions. Securities unrealized losses were attributed primarily to interest rates, not credit concerns; management reported no other-than-temporary impairment.
Investor verification points
- Track whether loan growth and retail deposit growth continue, and whether they sustain lower reliance on brokered funding and borrowings.
- Monitor margin performance, deposit costs, and the effect of subsequent Federal Reserve rate changes against management’s second-half outlook.
- Review CECL implementation disclosures and the eventual allowance and retained-earnings impact.
- Assess asset-quality trends, especially classified and nonaccrual loans, and the adequacy of reserves relative to acquired-loan discounts.
- Verify liquidity, capital ratios, share repurchases, and dividend payments in subsequent filings.