First Bancorp (FBNC) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019. First Bancorp is a North Carolina bank holding company. Financial amounts below are in U.S. dollars; income and cash-flow statement amounts are for the quarter.
Financial performance and condition
- Profit: Net income was $22.3 million, up 7.8% from $20.7 million. Diluted EPS was $0.75 versus $0.70. The company declared a $0.12-per-share dividend, compared with $0.10.
- Interest income and margin: Net interest income was $53.4 million, up 5.7%. Tax-equivalent net interest margin was 4.06%, down from 4.17%; the reported net yield on earning assets was 4.03% versus 4.14%.
- Other income and expenses: Noninterest income was $14.6 million, down from $15.8 million, primarily reflecting lower SBA loan-sale gains ($2.1 million versus $3.8 million). Noninterest expense fell to $39.3 million from $43.5 million, including lower merger costs and post-merger operating expenses. The effective tax rate was 20.9%, compared with 22.0%.
- Credit: The company recorded a $0.5 million loan-loss provision, versus a $3.7 million reversal in Q1 2018. Net charge-offs were $444,000; annualized net charge-offs were 0.04% of average loans. The allowance was $21.1 million, or 0.49% of loans.
- Cash flow: Operating activities provided $17.0 million, investing activities used $167.5 million, and financing activities provided $134.4 million. Cash and cash equivalents decreased $16.1 million to $446.8 million; securities purchases were a major investing outflow.
- Balance sheet and funding: Total assets were $6.05 billion; loans were $4.30 billion and deposits $4.80 billion. Borrowings were $406.1 million. Shareholders’ equity was $788.1 million. Loans grew 4.6% and deposits 6.7% year over year.
- Liquidity and capital: Liquid assets (cash and securities) were 22.6% of deposits and borrowings, up from 20.0% a year earlier. Unused available credit lines totaled $505 million. Total risk-based capital was 14.21%; the tangible common equity ratio was 9.21%.
Material changes and management commentary
- Quarterly organic loan growth was $54.7 million (1.3%); deposit growth was $137.9 million (3.0%). Management cited expansion in higher-growth markets, including Charlotte and Raleigh, and stated it expected continued loan growth in 2019.
- Management attributed margin compression to higher deposit and other funding costs, lower acquired-loan discount accretion, and significant loan interest recoveries in Q1 2018. Deposit costs rose faster than earning-asset yields.
- Management projected a slight near-term decline in 2019 net interest margin under its rate assumptions, citing loan and deposit pricing pressure. The filing does not provide a specific earnings or EPS forecast.
- Nonperforming assets declined to $39.5 million from $51.7 million a year earlier; nonperforming assets were 0.65% of total assets. Management cited improving asset quality and lower foreclosed-property balances.
- Adoption of lease accounting on January 1, 2019 added approximately $19.5 million of right-of-use assets and lease obligations; management reported no material earnings impact and an insignificant capital-ratio impact.
Risks, contingencies, and unusual items
- Interest-rate and competitive risks include a relatively flat yield curve and intensifying competition for deposits, which may pressure margins. Management noted near-term sensitivity to rate changes and uncertainty in acquired-loan discount accretion.
- Credit-loss estimates depend on economic conditions, borrower performance, collateral values, and management assumptions. The company said its allowance was adequate but warned that future evaluations or regulatory review could require additional reserves. CECL adoption was expected in 2020; the company could not yet reasonably estimate its impact.
- Unrealized losses on securities were attributed primarily to interest rates rather than credit concerns; management said it did not intend to sell the securities and did not consider them other-than-temporarily impaired.
- The company reported no pending legal proceedings it believed material and no material change in contractual obligations. It reported no significant derivative activity; off-balance-sheet arrangements were limited to letters of credit and repayment guarantees associated with trust preferred securities.
- Forward-looking statements are subject to risks including customer and economic conditions, acquisition integration, regulatory actions, and interest rates. The filing refers investors to the 2018 Form 10-K risk factors.
Most important facts for investors to verify
- Whether deposit pricing continues to rise faster than earning-asset yields, and the resulting effect on net interest margin.
- Loan and deposit growth, including the pace and funding cost of growth in higher-rate time deposits.
- Credit trends, acquired-loan discount levels, allowance adequacy, and the eventual CECL transition impact.
- Liquidity and capital levels, including available borrowing capacity and the effect of any future share repurchases or dividends.
- Performance of SBA lending and loan sales, given the year-over-year decline in SBA loan-sale gains.