First Bancorp — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Figures are unaudited; dollar amounts are in millions unless otherwise stated.
Business context and financial performance
First Bancorp is a North Carolina-based bank holding company. Its results reflect community banking and FDIC-assisted acquired loan portfolios, including assets still covered by FDIC loss-sharing agreements.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $31.5 | $29.6 | $61.7 | $59.3 |
| Provision (reversal) for loan losses | ($0.3) | $0.8 | ($0.02) | $0.7 |
| Noninterest income | $5.9 | $5.0 | $10.9 | $9.5 |
| Noninterest expense | $26.1 | $24.3 | $50.9 | $48.0 |
| Net income | $7.6 | $6.2 | $14.5 | $13.2 |
| Net income available to common shareholders | $7.6 | $6.0 | $14.4 | $12.8 |
| Diluted earnings per common share | $0.37 | $0.30 | $0.70 | $0.63 |
Financial position, cash flow and liquidity
- At June 30, total assets were $3,466.5; gross loans $2,598.1; deposits $2,872.0; borrowings $206.4; and shareholders’ equity $361.6. Against June 30, 2015, assets grew 7.9%, loans 7.7%, and deposits 8.3%.
- Cash and cash equivalents were $248.5, down $18.8 from year-end 2015. For the first six months, operating cash flow was $30.9, investing cash flow was negative $127.5, and financing cash flow was $77.8.
- Available unused credit lines totaled $454 at June 30, including an approximately $671 FHLB facility with $160 outstanding, a $35 correspondent-bank line, and an approximately $101 Federal Reserve discount-window line. Liquid assets were 19.8% of deposits and borrowings.
- Regulatory capital remained above minimums: total risk-based capital was 14.10% versus an 8.00% minimum; the tangible common equity-to-tangible assets ratio was 8.18%.
- Quarterly tax-equivalent net interest margin was 4.21%, versus 4.15% a year earlier. The six-month margin was 4.14%, versus 4.17%.
Material changes and management commentary
- Second-quarter common earnings rose 25.7% year over year; six-month common earnings rose 12.2%. Management attributed the improvement primarily to loan growth and lower total loan-loss provisions.
- Non-covered loans grew 9.6% year over year, including a $17.7 transfer from covered loans after FDIC protection expired. Management cited lending initiatives, market expansion and new banker hires. Transaction deposits grew while time deposits declined; borrowings also rose to support loan growth.
- Credit indicators improved: total nonperforming assets were $77.9 at June 30, down from $89.3 at December 31, 2015 and $99.4 a year earlier. Net charge-offs were $2.5 for the first half, versus $9.2 in the comparable 2015 period. The allowance was $26.0, or 1.00% of loans.
- Two 2016 acquisitions added an insurance agency and an SBA loan consulting business. The SBA acquisition contributed $0.7 of consulting fees through June 30. Acquisition-related goodwill and intangible assets were recorded; second-quarter merger and acquisition expense was $0.5.
- On April 1, loss-share protection expired for certain Bank of Asheville non-single-family assets, transferring $17.7 of loans and $1.2 of foreclosed property to non-covered status. First Bancorp assumed future losses on these assets; management did not expect those losses to be material beyond related allowances. Other FDIC loss-share agreements remain.
- A July 15 branch exchange transferred seven Virginia branches and acquired six North Carolina branches. A separate announced acquisition of Carolina Bank Holdings, valued at $97.3, was subject to regulatory approval and customary closing conditions; management expected completion in Q4 2016 or Q1 2017.
Outlook, risks and contingencies
- Management expected continued non-covered loan growth in 2016 and covered loans to keep declining through repayments, foreclosures and charge-offs. No specific earnings or EPS guidance was provided.
- Management projected additional net interest margin compression in the remainder of 2016, citing continued pressure on loan yields, a relatively flat yield curve and limited scope to lower already-low deposit costs. It also noted that acquired-loan discount accretion is variable and expected to decline as the remaining discount runs off.
- Interest-rate sensitivity is mixed: the company described itself as asset-sensitive in the very short term, but reported $981 more interest-bearing liabilities than earning assets subject to rate changes within one year. Management cautioned that repricing timing, administered deposit rates and the yield curve affect actual results.
- Credit losses, allowance estimates, collateral values, acquired-loan discount accretion and FDIC indemnification estimates involve judgment and may change. The company stated that the allowance was adequate but cautioned that future losses or regulatory reviews could require additional reserves.
- Management reported adequate liquidity and no pending legal proceedings it believed material. The filing identifies general economic, interest-rate, customer, acquisition-integration and regulatory risks. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Most important facts for investors to verify
- Whether loan growth continues without weakening underwriting or reversing the reported improvement in nonperforming assets and charge-offs.
- The pace and earnings impact of declining acquired-loan discount accretion, and whether margin compression matches management’s outlook.
- Actual losses and allowance adequacy for assets no longer covered by the expired FDIC agreement, plus future FDIC indemnification adjustments.
- Integration, performance and costs of the 2016 acquisitions, including the SBA Complete earn-out, and the approval, terms and timing of the Carolina Bank transaction.
- Funding mix and liquidity trends, including increased borrowings and brokered deposits, and capital effects of acquisitions and branch changes.