First Bancorp — Q3 2015 Form 10-Q
Business context and reporting period. First Bancorp is a North Carolina bank holding company. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless otherwise noted. Dollar amounts below are in millions except per-share data.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $30.4 | $31.3 | $89.7 | $100.7 |
| Net interest margin, tax-equivalent | 4.14% | 4.30% | 4.16% | 4.69% |
| Provision (reversal) for loan losses | $(1.4) | $1.5 | $(0.7) | $8.7 |
| Noninterest income | $3.5 | $4.6 | $13.0 | $9.9 |
| Noninterest expense | $24.6 | $25.9 | $72.6 | $74.3 |
| Net income | $7.0 | $5.6 | $20.2 | $17.9 |
| Net income available to common shareholders | $6.9 | $5.4 | $19.7 | $17.3 |
| Diluted EPS | $0.34 | $0.27 | $0.97 | $0.85 |
- Balance sheet at September 30: assets were $3.27 billion, loans $2.48 billion, deposits $2.71 billion, borrowings $176.4 million and shareholders’ equity $371.2 million. Compared with September 30, 2014, assets rose 2.4%, loans 2.3% and deposits 1.1%.
- Loan growth and funding: Non-covered loans increased $82.3 million year over year, while FDIC-covered loans declined $26.6 million. Deposit growth was concentrated in checking, money-market and savings accounts; time deposits and brokered deposits declined. Borrowings rose $60 million from a year earlier, including new second-quarter funding with an approximately two-year average life and 1.17% weighted-average rate.
- Cash flow, nine months: operating activities provided $31.6 million; investing activities used $100.4 million; financing activities provided $34.5 million. Cash and cash equivalents decreased $34.3 million to $218.8 million.
- Asset quality: total nonperforming assets were $91.7 million, or 2.80% of assets, down from $116.8 million and 3.66% a year earlier. Nonaccrual loans were $47.7 million; accruing troubled debt restructurings were $33.1 million. No loans were over 90 days past due and still accruing. The allowance was $30.1 million, 1.21% of loans, versus $44.1 million and 1.82% a year earlier. Nine-month net charge-offs were $9.8 million, compared with $13.1 million.
- Capital and liquidity: total risk-based capital was 15.99% (8.00% regulatory minimum); Common Equity Tier 1 was 11.33%; tangible common equity to tangible assets was 8.27%. Liquid assets were 19.4% of deposits and borrowings. Available unused credit lines totaled $438 million, and management said liquidity was adequate for foreseeable operating needs.
Changes, outlook and principal risks
- Common-shareholder earnings rose year over year in both periods, primarily because loan-loss provisions were substantially lower. The Q3 provision was a reversal, and the nine-month total was also a reversal.
- Net interest income and margin declined, particularly year to date. Management attributed the pressure mainly to lower accretion of acquired-loan discounts: $3.9 million in the first nine months of 2015 versus $13.8 million in 2014. Lower loan yields in the prolonged low-rate environment also weighed on results; investment purchases and lower funding costs partly offset the effect.
- Core noninterest income fell 6.2% in Q3 and 5.1% year to date, primarily reflecting lower deposit service charges. Total noninterest income increased year to date because noncore items were less negative than in 2014. Expenses declined, partly because 2014 included $0.9 million of charges for consolidating nine branches.
- Management gave no formal earnings guidance. Its interest-rate modeling indicated some net interest margin compression for the remainder of 2015, assuming no rate changes, as loan yields were expected to continue trending downward and many deposit rates were already near zero. Management also cautioned that acquired-loan discount accretion is variable and expected to keep declining.
- Credit risk remains material despite improving trends: management noted that nonperforming and classified assets remain elevated relative to historical averages and that allowance estimates depend on judgments, economic conditions and regulatory review. Approximately 91% of loans were real estate loans.
- Interest-rate sensitivity is mixed: management described the bank as asset-sensitive in the short term, but stated that the 12-month liability-sensitive position could temper the effect. A flat yield curve and intense loan competition were cited as pressures on loan pricing and margins.
- The company redeemed $32 million of Series B Small Business Lending Fund preferred stock in June. It redeemed the remaining $31.5 million on October 16, 2015, after quarter-end, ending participation in the program. The June redemption contributed to lower reported capital ratios.
- A disputed FDIC claim was resolved in Q2: the company wrote off $406,000 of a claim not reimbursed by the FDIC. Management reported no pending legal proceedings it considered material. The filing identified forward-looking statements as subject to risks including customer conditions and strategies, acquisition integration, regulatory action, interest rates and the general economy.
Important facts for investors to verify
- Whether loan growth and improving credit metrics continue, and whether the lower allowance remains adequate as the covered portfolio runs off.
- How quickly acquired-loan discount accretion declines and how that affects net interest income, margin and FDIC indemnification expense.
- Whether deposit mix, funding costs and new borrowings support loan growth without creating undue liquidity or interest-rate risk.
- The effect of the October 2015 preferred-stock redemption on capital, earnings available to common shareholders and future dividends.
- Management’s disclosed liquidity sources, regulatory capital ratios and assumptions behind its margin outlook; results may differ from forward-looking expectations.