First Bancorp — Q1 2014 Form 10-Q
Business context and reporting period. First Bancorp is a North Carolina bank holding company. This unaudited quarterly report covers the three months ended March 31, 2014; income and cash-flow comparisons are with Q1 2013, while balance-sheet comparisons are primarily with March 31, 2013 and December 31, 2013. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
- Earnings: Net income was $5.7 million versus $3.1 million. Net income available to common shareholders was $5.5 million, or $0.27 per diluted share, versus $2.9 million, or $0.14 per diluted share.
- Revenue and margin: Net interest income rose 11.3% to $35.5 million. Tax-equivalent net interest margin increased to 5.13% from 4.69%; management attributed the improvement mainly to higher acquired-loan discount accretion and lower funding costs.
- Credit costs: Provision for loan losses declined to $3.6 million from $11.1 million. Net charge-offs were $4.0 million, down from $7.8 million. The allowance for loan losses was $48.1 million, or 1.97% of loans.
- Noninterest income and expenses: Reported noninterest income was $0.3 million versus $7.1 million. Core noninterest income, as defined by the company, increased 15.5% to $7.5 million. Noninterest expenses increased 1.4% to $23.6 million.
- Cash flow: Operating cash flow was $14.2 million versus $17.0 million; investing cash flow was $22.7 million versus $81.0 million; financing cash flow was $123.9 million versus an outflow of $23.2 million. Cash and cash equivalents rose $160.8 million during the quarter to $384.1 million, with financing inflows including $90 million of new borrowings.
- Balance sheet and funding: Total assets were $3.315 billion, loans $2.447 billion, deposits $2.787 billion, and shareholders’ equity $376.1 million. Borrowings were $136.4 million, up from $46.4 million at year-end 2013. Versus a year earlier, assets rose 1.0%, loans 2.1%, and deposits declined 2.5%.
- Liquidity and capital: Unused available credit lines totaled $288 million. Liquid assets were 21.1% of deposits and borrowings, versus 18.7% a year earlier. Total risk-based capital was 16.83%; the tangible common equity-to-tangible assets ratio was 7.30%.
- Asset quality: Nonperforming assets totaled $141.1 million, down from $175.4 million a year earlier; the ratio to total assets improved to 4.26% from 5.35%. Non-covered nonperforming assets were broadly stable year over year at $82.2 million, while covered nonperforming assets declined to $58.9 million from $92.0 million.
Material changes versus prior comparable period
- Common-shareholder earnings and diluted EPS increased, supported by higher net interest income and substantially lower loan-loss provisions.
- Net interest margin improved 44 basis points year over year. Acquired-loan discount accretion was $6.4 million versus $3.7 million in Q1 2013, making part of the margin benefit dependent on acquired-asset performance and payoffs.
- Reported noninterest income fell sharply because FDIC indemnification asset income/expense moved from $4.9 million of income to $4.9 million of expense. Core noninterest income nevertheless increased, notably from deposit service charges.
- Non-covered loans grew 5.8% year over year, while covered loans declined 27.7%. Deposit balances fell year over year as time deposits contracted, though transaction accounts grew.
- Cash increased substantially in Q1, alongside the $90 million borrowing. The company said the funding was intended to strengthen cash and anticipate future loan growth.
Outlook, commentary, risks and unusual items
- Management expects higher non-covered loan growth for the remainder of 2014 and continued decline in covered loans. It also expects deposit shifts away from maturing time deposits to continue.
- Based on its interest-rate modeling, management projected some net interest margin compression for the remainder of 2014, citing expected lower loan yields and limited room to reduce already-low deposit rates. Acquired-loan discount accretion is less predictable and may vary materially between periods.
- A Cooperative Bank non-single-family loss-share agreement expires June 30, 2014. The associated remaining portfolio will move from covered to non-covered, after which First Bank will bear future losses on those assets. Management did not expect the expiration itself to have a material company-wide impact, but noted expected accelerated discount accretion and related indemnification expense before expiry.
- FDIC loss-share arrangements generally reimburse 80% of covered-asset losses; related changes in the indemnification asset create volatility in reported noninterest income. The indemnification asset was $35.5 million at quarter-end, down from $48.6 million at year-end.
- Management described local economic recovery as uneven and less robust than the national recovery, with problem assets still elevated versus historical averages. It considered the allowance adequate but cautioned that economic changes, estimates, and regulatory review could require future adjustments.
- The filing identifies interest-rate and credit risks, changing customer strategies, regulatory actions, general economic conditions, and acquisition integration as risks to forward-looking results. Management stated that no legal proceeding was expected to materially affect financial position and that disclosure controls were effective.
Important facts for investors to verify
- Whether the higher margin and earnings persist as acquired-loan accretion changes and management anticipates margin compression.
- Trends in non-covered nonperforming loans, charge-offs, classified assets, and the adequacy of the $48.1 million allowance.
- The June 30, 2014 loss-share expiration: remaining exposure transferred to non-covered status, future losses borne by the bank, and related FDIC asset accounting.
- Funding and liquidity after the $90 million borrowing, including deposit composition, brokered deposits, available credit capacity, and loan growth.
- The sustainability of core fee income after the deposit-product and fee changes, and the contrast with volatile reported noninterest income.
- Regulatory capital and the accuracy of key estimates, particularly acquired-loan values, discount accretion, FDIC indemnification, and collateral-dependent asset valuations.