First Bancorp — Q1 2018 Form 10-Q
Business context and reporting period. First Bancorp is a North Carolina bank holding company. This unaudited filing covers the three months ended March 31, 2018, with comparisons to Q1 2017 and balance-sheet comparisons to March 31, 2017 and December 31, 2017. Comparisons are affected by the Carolina Bank acquisition in March 2017 and Asheville Savings Bank acquisition in October 2017; their results are included only from their respective acquisition dates.
Financial highlights
| Metric | Q1 2018 / March 31, 2018 | Comparable period |
|---|---|---|
| Net income available to common shareholders | $20.7 million | $7.6 million in Q1 2017 |
| Diluted earnings per share | $0.70 | $0.34 in Q1 2017 |
| Net interest income | $50.5 million | $34.3 million in Q1 2017 |
| Tax-equivalent net interest margin | 4.19% | 4.07% in Q1 2017 |
| Provision for loan losses | Reversal of $3.7 million | $0.7 million provision in Q1 2017 |
| Noninterest income / expense | $15.9 million / $43.6 million | $9.8 million / $32.1 million in Q1 2017 |
| Operating cash flow | $5.4 million | $0.7 million in Q1 2017 |
| Total assets | $5.64 billion | $4.44 billion at March 31, 2017 |
| Loans, net / deposits | $4.09 billion / $4.50 billion | $3.27 billion / $3.63 billion at March 31, 2017 |
| Borrowings / shareholders’ equity | $407.1 million / $705.7 million | $290.4 million / $489.5 million at March 31, 2017 |
| Cash and cash equivalents | $526.7 million | $405.2 million at March 31, 2017 |
Material changes and operating trends
- Net income rose about 174% and diluted EPS about 106% year over year. These gains are not directly like-for-like: acquired businesses contributed to growth, and average loans were up 41.2% year over year.
- Net interest income increased 47.3%, supported by acquisitions, organic loan growth, higher asset yields and a higher margin. The company recorded $2.1 million of acquired-loan discount accretion, versus $1.4 million a year earlier; approximately $750,000 of loan interest recoveries also benefited the quarter.
- Core noninterest income was $16.2 million, up from $9.8 million. SBA loan-sale gains increased to $3.8 million as the guaranteed portions of $47.2 million of newly originated SBA loans were sold, compared with $0.6 million of gains on $7.3 million sold in Q1 2017.
- Noninterest expense increased 35.9%, primarily reflecting acquisitions, personnel and operating costs, and higher intangible amortization. Merger and acquisition expenses were $2.8 million.
- Asset quality improved year over year: nonperforming assets were $51.7 million, down from $60.0 million, and were 0.92% of assets versus 1.35%. Net recoveries were $3.7 million, including payoffs of four previously charged-down loans. The allowance was $23.3 million, or 0.57% of loans, versus 0.72% a year earlier; acquired-loan discounts are also relevant to loss coverage.
- Year-over-year growth included $606.2 million of acquired loans and $679.1 million of acquired deposits. First-quarter organic loan growth was $71.4 million and deposit growth was $88.8 million. A $41 million money-market deposit was expected to leave in Q2.
- Available-for-sale securities recorded an unrealized loss of $7.3 million before tax, contributing to a $5.5 million other comprehensive loss. Management attributed the securities losses primarily to interest rates, not credit concerns, and reported no other-than-temporary impairment.
Liquidity, capital, outlook and risks
- Cash from operations was $5.4 million; investing activities used $54.2 million, financing activities provided $86.1 million, and cash increased $37.2 million during the quarter. The filing reports liquid assets at 20.0% of deposits and borrowings, compared with 19.2% a year earlier.
- Unused available credit lines were $496 million at quarter-end. The company reported approximately $911 million of FHLB capacity, with $353 million outstanding, plus a $35 million correspondent-bank line and an approximately $93 million Federal Reserve discount-window line, neither of the latter two drawn. Management considered liquidity adequate for foreseeable operating needs.
- Regulatory capital ratios exceeded stated minimums: Common Equity Tier 1 was 11.01%, Tier 1 risk-based capital 12.23%, total risk-based capital 12.78%, and Tier 1 leverage 9.88%. Tangible common equity to tangible assets was 8.35%.
- Management expected continued loan growth in 2018. Based on modeling that assumed two additional rate increases during 2018, it expected net interest margin to remain fairly stable for the rest of the year, with asset yields rising but deposit-rate pressure increasing. The filing gives no numerical earnings or EPS guidance.
- Conversion of Asheville Savings Bank’s data systems was completed and three Asheville-area branches were consolidated in March. Management estimated annual expense savings of $4.0–$4.5 million.
- The effective tax rate fell to 22.0% from 33.2%, mainly reflecting the federal tax-rate reduction under the 2017 Tax Cuts and Jobs Act. The company warned that adoption of CECL, effective for it in 2020, is expected to significantly increase the recorded allowance for loan losses.
- Interest-rate risk remains material. The company reported $1.3 billion more interest-bearing liabilities than earning assets repricing within one year, while noting that managed-rate deposits may not move in line with market rates. It also cautioned that acquired-loan discount accretion can vary with credit performance and prepayments.
- Management reported no pending legal proceedings it considered material and no material change in contractual obligations or commercial commitments. The filing identifies no other material contingency; it cautions that loan-loss estimates depend on assumptions and may require future adjustments.
Important facts for investors to verify
- How much of earnings growth reflects acquisitions, recoveries, SBA loan-sale gains, and acquired-loan accretion, and how sustainable are those contributions?
- Whether organic loan and deposit growth continues, and the effect and timing of the expected $41 million deposit outflow.
- Whether asset-quality trends and the allowance remain adequate, particularly as acquired-loan discounts run off and CECL is adopted.
- Whether the expected $4.0–$4.5 million annual savings from the Asheville conversion and branch consolidations are realized, alongside integration and merger costs.
- How higher interest rates and deposit competition affect funding costs and net interest margin; confirm management’s rate assumptions and margin outlook against subsequent results.
- Whether unrealized securities losses, credit concentrations in real estate lending, capital ratios, and available borrowing capacity change materially.