First Bancorp — Q2 2014 Form 10-Q
Business context and period: First Bancorp is a North Carolina bank holding company. This unaudited filing covers the quarter and six months ended June 30, 2014; comparisons are with the same 2013 periods unless otherwise noted. Financial statement amounts are in millions of dollars unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net income was $6.6 million and net income available to common shareholders was $6.4 million, or $0.32 per diluted share, versus $5.6 million and $5.4 million, or $0.27 per diluted share, in Q2 2013. For the first half, common earnings were $11.9 million, or $0.59 per diluted share, versus $8.2 million, or $0.41.
- Net interest: Q2 net interest income declined 5.0% to $33.8 million; first-half net interest income rose 2.7% to $69.3 million. Tax-equivalent net interest margin was 4.65% in Q2, down from 5.10%; first-half margin was 4.89%, versus 4.90%. Management cited lower asset yields and reduced purchase-accounting loan discount accretion for the quarterly margin decline.
- Credit costs and asset quality: Provision for loan losses was $3.7 million in Q2 and $7.2 million for the first half, down from $5.6 million and $16.7 million, respectively. Total nonperforming assets were $123.2 million (3.77% of assets), down from $168.2 million a year earlier. Non-covered nonperforming assets, however, rose to $84.1 million from $79.1 million; non-covered nonperforming loans were $74.8 million, including $47.5 million of nonaccrual loans. The allowance was $45.8 million, or 1.88% of loans. First-half net charge-offs were $9.9 million, compared with $12.3 million.
- Noninterest items and expenses: Q2 noninterest income was $5.0 million versus $4.5 million; first-half income fell to $5.3 million from $11.6 million. Core noninterest income increased 8.6% in Q2 and 11.9% for the first half. First-half reported noninterest income was affected by $6.5 million of FDIC indemnification asset expense and foreclosed-property losses, partly offset by $0.8 million of securities gains. Noninterest expense declined to $24.8 million in Q2 and $48.3 million in the first half; the prior-year periods included $1.6 million of severance expense in Q2 2013.
- Balance sheet, funding and liquidity: At June 30, total assets were $3.27 billion, loans $2.43 billion, deposits $2.75 billion, and shareholders’ equity $381.1 million. Compared with June 30, 2013, assets rose 0.6%, loans 0.1%, and deposits fell 2.3%. Cash and cash equivalents were $407.3 million. Borrowings were $116.4 million, including $70 million of net new borrowing during the first half; borrowings were $46.4 million at both June 30, 2013 and December 31, 2013. First-half operating cash flow was $8.5 million, versus $37.7 million a year earlier; investing activities provided $105.5 million and financing activities provided $70.0 million.
- Capital: The company reported a 17.14% total risk-based capital ratio, an 11.15% Tier 1 leverage ratio, and a 7.57% tangible common equity-to-tangible assets ratio at June 30. Management stated that the company remained well-capitalized.
Material changes, outlook and risks
- On July 1, 2014, a loss-share agreement covering Cooperative Bank non-single-family assets expired. First Bancorp disclosed that $39.7 million of loans and $3.0 million of foreclosed real estate moved from covered to non-covered status; it will bear future losses on these assets. The loans included $9.7 million on nonaccrual and $2.1 million in accruing troubled debt restructurings. Approximately $1.7 million of related allowance was transferred to the non-covered allowance.
- Management expected some further net interest margin compression during the remainder of 2014, citing continued pressure on loan yields and deposit rates already near zero. It expected non-covered loan growth to improve, but noted competition for high-quality loans could constrain overall growth; covered loans were expected to continue declining.
- Management said asset quality remained weaker than historical norms and that non-covered problem assets had increased modestly. It considered the allowance adequate but cautioned that economic or portfolio changes, estimation uncertainty, and regulatory examinations could require additional provisions or asset-value adjustments.
- Funding trends included growth in transaction deposits and declines in time deposits. Management expected deposit shifts to continue. The filing reported $316 million of unused available credit lines and liquid assets equal to 20.4% of deposits and borrowings, and stated liquidity was adequate for foreseeable operating needs.
- Interest-rate risk is significant: management described short-term positioning as asset-sensitive, while its one-year repricing analysis showed about $832 million more interest-bearing liabilities than earning assets subject to rate changes within one year. Purchase-accounting discount accretion is variable and depends on acquired-loan performance and repayment timing.
- The $63.5 million Series B preferred stock dividend rate was 1.0% and, if not redeemed, was scheduled to increase to 9.0% in March 2016. The company declared a common dividend of $0.08 per share. It reported no material legal proceedings, no significant derivative activity, and effective disclosure controls.
Most important facts for investors to verify
- Track post-expiration credit performance, provisions, charge-offs and recoveries for the loans no longer protected by the FDIC loss-share agreement.
- Assess whether earnings growth persists after considering loan discount accretion, FDIC indemnification adjustments, securities gains and foreclosed-property results.
- Monitor non-covered nonaccrual loans and nonperforming assets, allowance coverage, and the concentration of lending in real estate.
- Check whether margin compression, competitive loan pricing, and continued deposit shifts affect core profitability and funding costs.
- Review the use and cost of borrowings, available liquidity, regulatory capital, and the scheduled 2016 increase in the Series B preferred dividend rate.