First Bancorp — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. First Bancorp is a North Carolina bank holding company.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $30.4 | $30.4 | $92.1 | $89.7 |
| Net interest margin, tax-equivalent | 3.93% | 4.14% | 4.07% | 4.16% |
| Net income | $4.7 | $7.0 | $19.2 | $20.2 |
| Net income available to common shareholders | $4.6 | $6.9 | $19.0 | $19.7 |
| Diluted EPS | $0.23 | $0.34 | $0.93 | $0.97 |
| Net interest income plus noninterest income | $35.5 | $33.9 | $108.2 | $102.7 |
- Q3 noninterest income was $5.2 million versus $3.5 million; the nine-month totals were $16.1 million and $13.0 million. Management-defined core noninterest income increased 34.2% for Q3 and 15.5% for the nine-month period, supported by insurance and SBA activities.
- Noninterest expense rose to $27.7 million in Q3 from $24.6 million, and to $78.6 million for nine months from $72.6 million. Higher staffing and growth-related costs, acquisition expenses, and other operating costs contributed.
- Reported earnings comparisons include a $5.7 million Q3 expense to write off the remaining FDIC indemnification asset following termination of loss-share agreements. A $1.4 million gain on the branch exchange partly offset the charge. The Q3 effective tax rate was 40.0%, which management attributed in part to tax matters related to the exchange.
Financial condition, cash flow and capital
- At September 30, total assets were $3.54 billion, gross loans $2.65 billion, deposits $2.91 billion, borrowings $236.4 million and shareholders’ equity $364.9 million. Compared with September 30, 2015, assets increased 8.1%, loans 6.8% and deposits 7.5%; borrowings increased from $176.4 million.
- Cash and cash equivalents were $281.3 million, up $14.1 million since year-end 2015. For the first nine months, operating cash flow was $31.7 million, investing cash outflow $185.5 million and financing cash inflow $167.9 million. Investing outflows included $53.6 million net cash paid for acquisitions and loan growth; financing inflows included deposit growth and $50.0 million of additional borrowings.
- Deposit growth included a significant increase in brokered deposits to $147.4 million, up from $46.7 million a year earlier. Management said loan growth outpaced retail deposit growth in newer markets, increasing reliance on brokered deposits and borrowings. Retail time deposits declined.
- Unused and available credit lines totaled $377 million. Liquid assets were 19.6% of deposits and borrowings, compared with 19.4% a year earlier. Management considered liquidity adequate for foreseeable operating needs.
- Total risk-based capital was 13.49%; common equity Tier 1 was 10.67%, Tier 1 capital 12.57%, and Tier 1 leverage 10.22%. Tangible common equity to tangible assets was 8.03%, down from 8.27% a year earlier. The common dividend remained $0.08 per share per quarter.
Asset quality and material changes
- Nonperforming assets fell to $70.2 million from $91.7 million a year earlier; nonperforming assets were 1.98% of total assets versus 2.80%. Nonaccrual loans were $32.8 million and accruing restructured loans $27.3 million. Management noted that asset quality had improved but remained elevated relative to historical levels.
- The allowance for loan losses was $24.6 million, or 0.93% of loans, compared with $30.1 million, or 1.21%, a year earlier. Nine-month net charge-offs were $2.9 million versus $9.8 million; the annualized net charge-off ratio was 0.15% versus 0.55%. The company recorded no Q3 provision and a $23,000 net reversal for the first nine months.
- All FDIC loss-share agreements were terminated effective July 1, 2016. The company now bears all future losses and recoveries on the affected assets; previously covered loans and foreclosed real estate became non-covered. Management expects the end of recurring indemnification-asset expense to benefit future earnings, but future credit exposure is no longer shared with the FDIC.
- Q3 net interest margin narrowed to 3.93% from 4.14%. Management cited lower loan yields, competition, the low-rate environment and lower purchased-loan discount accretion. Loan discount accretion was $0.8 million in Q3 versus $1.2 million a year earlier and $3.6 million for nine months versus $3.9 million.
Acquisitions, outlook and risks
- During 2016, First Bancorp acquired Bankingport, an insurance agency, and SBA Complete, an SBA consulting firm, and completed a branch exchange: it acquired six North Carolina branches and sold seven Virginia branches. The exchange generated the $1.4 million gain and included acquired loans of $152.2 million and deposits of $111.3 million, against sold loans of $150.6 million and deposits of $134.3 million.
- The company agreed to acquire Carolina Bank Holdings for a stated deal value of $97.3 million, with consideration structured for 75% stock and 25% cash. The transaction, subject to regulatory approval and customary conditions, was expected to close in Q4 2016 or Q1 2017; completion was not assured.
- Management expected continued loan growth, supported by market expansion and experienced hires, but projected further net interest margin compression for the remainder of 2016. It cited falling loan yields, deposit rates already near zero, a relatively flat yield curve and competition for quality loans. The filing provides no specific earnings or EPS guidance.
- Other risks include credit losses exceeding reserves, the uncertain timing and amount of acquired-loan discount accretion, interest-rate and funding-cost changes, integration and execution of acquisitions, and regulatory or economic developments. The company reported no material pending legal proceedings and no material change in contractual obligations or commercial commitments.
Important facts for investors to verify
- Whether the expected Carolina Bank acquisition closed, on what terms, and with what integration costs and effects on capital and earnings.
- Whether improved asset-quality trends continued after the FDIC loss-share protection ended, and whether the allowance remains adequate as loan growth continues.
- How margin compression, declining acquired-loan accretion and deposit-funding needs affect earnings, particularly given increased brokered deposits and borrowings.
- Whether SBA and insurance growth becomes sustainable and offsets higher personnel, operating and acquisition-related expenses.