First Bancorp — Q3 2018 Form 10-Q
Business context and reporting period. First Bancorp is a North Carolina-based bank holding company. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods unless stated otherwise. Results reflect the 2017 Carolina Bank and Asheville Savings Bank acquisitions, with Asheville included from October 1, 2017.
Financial performance and condition
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $51.8 million | $41.6 million | $153.6 million | $115.9 million |
| Noninterest income | $15.4 million | $12.4 million | $47.4 million | $34.0 million |
| Income before taxes | $27.9 million | $19.6 million | $83.6 million | $47.6 million |
| Net income | $22.0 million | $13.1 million | $65.4 million | $31.8 million |
| Diluted EPS | $0.74 | $0.53 | $2.21 | $1.33 |
| Net interest margin, tax-equivalent | 4.06% | 4.16% | 4.12% | 4.11% |
- Q3 net income increased 68%; diluted EPS increased 40%. Nine-month net income more than doubled, while diluted EPS rose 66%. Acquisition-related growth and the lower 2018 effective tax rate contributed; share counts also increased following acquisition-related stock issuance.
- Q3 interest expense rose to $6.4 million from $3.4 million as deposit and borrowing costs increased. Nine-month interest expense was $16.4 million versus $8.5 million. Management attributed higher net interest income mainly to acquisitions and loan growth; for Q3, funding costs outpaced asset-yield increases and compressed margin.
- Core noninterest income was $15.7 million in Q3, up 22%, and $47.2 million year to date, up 38%. SBA loan-sale gains were $8.8 million year to date versus $3.2 million; presold mortgage fees declined to $2.2 million from $4.1 million.
- Noninterest expense was $39.2 million in Q3 and $121.7 million year to date, up from $34.4 million and $101.5 million. Acquisitions and growth initiatives were principal contributors. Nine-month merger and acquisition expense included a $1.3 million increase in an earn-out liability.
- Effective tax rates fell to 21.2% for Q3 and 21.8% year to date, from 33.3% in both 2017 periods, primarily due to the Tax Cuts and Jobs Act.
- At September 30, total assets were $5.71 billion, loans $4.19 billion, deposits $4.53 billion, borrowings $406.6 million, and shareholders’ equity $743.1 million. Versus September 2017, assets grew 24.4%, loans 22.2%, and deposits 24.0%, substantially reflecting acquisitions. Organic loan growth was $148.3 million in the first nine months; deposits grew $121.4 million.
- Cash and cash equivalents were $510.7 million. Nine-month operating cash flow was $23.7 million, compared with a $9.9 million use in 2017; investing used $114.8 million and financing provided $112.4 million. Liquid assets were 19.6% of deposits and borrowings, versus 18.1% a year earlier. Unused available credit lines totaled $657 million.
- Regulatory capital remained above stated minimums: total risk-based capital was 13.68%, Common Equity Tier 1 was 11.97%, and Tier 1 leverage was 10.34%. Tangible common equity to tangible assets was 8.95%, up from 7.95% a year earlier.
Material changes, outlook and risks
- Credit metrics improved year over year: nonperforming assets were $41.1 million, or 0.72% of assets, versus $53.0 million and 1.16%. The allowance for loan losses was $20.5 million, or 0.49% of loans, down from $24.6 million and 0.72%. Nine-month results included a $4.3 million provision reversal and $1.5 million in net recoveries. The allowance plus unaccreted acquired-loan discount equaled 1.07% of loans.
- Q3 included a sale of about $5.2 million of smaller nonperforming loans, resulting in $2.2 million of charge-offs; Q3 net charge-offs were $2.8 million. Management cited improving asset quality but cautioned that future conditions or regulatory reviews could require allowance changes.
- Management expected continued loan growth through the remainder of 2018 and projected a fairly stable net interest margin over the following 12 months, assuming gradual rate increases. It expected asset yields to rise but also anticipated pressure to increase deposit rates. These are forward-looking expectations, not guarantees.
- Interest-rate risk remains important: management reported $1.3 billion more interest-bearing liabilities than earning assets subject to rate changes within one year, while noting deposit pricing behavior and repricing lags complicate the simple comparison. A relatively flat yield curve and competition constrained loan pricing and margin expansion. Acquired-loan discount accretion is variable and could change with credit performance or repayments.
- The company was assessing possible effects of Hurricanes Florence and Michael and said it did not then expect losses to require a significant provision. The filing also identifies CECL adoption, expected after December 15, 2019, as a potential material change to credit-loss estimates; its preliminary assessment anticipated an effect, particularly on the allowance, but the amount was not yet clear.
- Available-for-sale securities had $12.5 million of gross unrealized losses at September 30, largely attributed to interest rates. Management concluded there was no other-than-temporary impairment and did not expect to be forced to sell before recovery. Nine-month other comprehensive loss was $7.8 million, principally reflecting securities valuation changes.
- No material pending legal proceedings were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- How much of earnings growth is sustainable organic growth versus acquisitions, tax-rate changes, and acquired-loan discount accretion?
- Whether deposit-cost increases continue to outpace asset-yield growth, and whether the stated stable-margin outlook is borne out.
- Credit quality, charge-offs and recoveries, and the adequacy of the allowance—especially given its decline and the upcoming CECL impact.
- Realized effects of the hurricanes and whether acquired-loan discount accretion remains durable.
- Organic loan and deposit growth, funding mix and liquidity, alongside the rise in large time deposits and borrowing costs.