First Bancorp — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; balance-sheet comparisons are primarily with December 31, 2016 and March 31, 2016. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context and key financial results
- First Bancorp is a bank holding company. On March 3, 2017, it acquired Carolina Bank Holdings, adding approximately $682 million of assets, $497 million of loans and $585 million of deposits at acquisition. The quarter includes Carolina Bank’s results only from the acquisition date, so year-over-year comparisons reflect both acquisition effects and organic growth.
- Earnings: Net income was $7.6 million, up from $6.8 million. Net income available to common shareholders was also $7.6 million versus $6.8 million. Diluted EPS was $0.34, compared with $0.33; basic EPS was $0.34 in both periods. The declared common dividend was $0.08 per share.
- Revenue and margin: Net interest income was $34.3 million, up 13.6% from $30.2 million. Total noninterest income was $9.8 million versus $5.0 million; 2016 included $2.4 million of FDIC indemnification expense, while 2017 included $1.3 million of SBA consulting fees and $0.6 million of SBA loan-sale gains. Management’s core noninterest income measure was $9.8 million, up 33.5% from $7.3 million. Tax-equivalent net interest margin was 4.07%, unchanged year over year.
- Costs and credit provision: Noninterest expense increased 29.5% to $32.1 million, including $2.4 million of merger and acquisition expense versus $0.2 million a year earlier. The loan-loss provision was $0.7 million versus $0.3 million. The effective tax rate was 33.2%, compared with 32.7%.
- Cash flow: Operating cash flow was $0.7 million, down from $19.9 million. Investing activities provided $3.6 million, including $56.2 million net cash received in the acquisition; financing activities provided $94.9 million, principally reflecting deposit growth. Cash and cash equivalents increased $99.2 million to $405.2 million.
- Balance sheet and funding: Total assets were $4.44 billion, loans $3.29 billion, deposits $3.63 billion, borrowings $290.4 million and shareholders’ equity $489.5 million. Compared with March 31, 2016, assets rose 31.3%, loans 29.5% and deposits 28.4%; acquisition activity contributed materially. Management reported organic loan growth of $251.1 million (9.9%) and organic deposit growth of $239.9 million (8.5%) over the twelve months.
- Credit quality and capital: Nonperforming assets were $60.0 million, down 27.0% year over year but up $0.9 million from year-end, partly due to acquired foreclosed real estate. Nonperforming assets were 1.35% of assets versus 2.43% a year earlier; annualized net charge-offs were 0.13% of average loans versus 0.35%. The allowance was $23.5 million, or 0.72% of loans. Total risk-based capital was 12.56%; tangible common equity to tangible assets was 7.79%.
Material changes and management commentary
- Carolina Bank was acquired for approximately $139.8 million of total consideration: $114.5 million in First Bancorp stock and $25.3 million in cash. The transaction added $67.8 million of goodwill and an $8.8 million core deposit intangible. Valuations were preliminary and could be revised during the measurement period. Carolina Bank systems conversion was scheduled for August 2017.
- Management attributed higher net interest income primarily to loan growth. The reported margin benefited by about nine basis points from a resolved acquired loan relationship: $295,000 of previously foregone interest and $443,000 of discount accretion. Total purchase-accounting loan discount accretion was $1.4 million, compared with $1.1 million in Q1 2016.
- Management expected continued loan growth in 2017. Based on its model assuming one further interest-rate increase during 2017, it expected net interest margin to remain fairly stable for the rest of the year. It expected investment and excess-cash yields to rise, loan yields to remain stable and deposit rates to rise gradually. These are expectations, not formal earnings guidance.
- Funding growth outpaced retail deposit growth in the company’s expansion markets; brokered deposits rose to $157.2 million from $71.1 million a year earlier, and borrowings rose to $290.4 million from $186.4 million. Liquid assets as a share of deposits and borrowings declined to 19.2% from 19.8% year over year. Management said liquidity remained adequate; available unused credit lines were $476 million.
- Interest-rate risk is mixed: management described the company as asset-sensitive in the short term, while its one-year repricing analysis showed $856 million more interest-bearing liabilities than earning assets subject to rate changes within one year. The filing notes that deposit pricing behavior, a relatively flat yield curve and competitive loan pricing affect actual sensitivity. Acquired-loan discount accretion is also variable and may change with credit performance or repayments.
Outlook, risks and unusual items
- On May 1, 2017, First Bancorp announced an agreement to acquire ASB Bancorp for approximately $175 million in cash and stock. The deal was expected to close in Q4 2017, subject to regulatory and shareholder approvals and other customary conditions.
- The FDIC loss-share agreements were terminated in September 2016. The company now bears future losses and recoveries on those previously covered assets; there was no FDIC indemnification asset at March 31, 2017.
- Key risks include credit-loss estimation and asset quality, integration and execution of acquisitions, interest-rate and funding costs, competition in growth markets, and general economic and regulatory conditions. The allowance for acquired Carolina Bank loans was not recorded at acquisition because loans were initially recognized at fair value; management cautioned that subsequent credit deterioration could require provisions.
- The filing reports no pending legal proceedings management believed material, no significant derivative activity, and no material change in internal control over financial reporting. Disclosure controls were judged effective.
Important facts for investors to verify
- How much of earnings and balance-sheet growth reflects Carolina Bank versus sustainable organic performance, and what integration costs or synergies remain?
- Whether the reported 4.07% margin can be sustained after excluding the acquired-loan resolution benefit and other purchase-accounting accretion.
- Credit performance of acquired and legacy loans, including the $19.2 million of acquired purchased-credit-impaired loans, and the adequacy of the 0.72% allowance-to-loans ratio.
- Trends in brokered deposits, borrowings, deposit pricing and available liquidity as loan growth continues.
- Capital and dilution implications of the Carolina Bank acquisition and proposed ASB Bancorp transaction, including closing conditions and final consideration.