First Bancorp — Form 10-Q Summary
Business context and period. First Bancorp, a North Carolina bank holding company, reported unaudited results for the quarter and six months ended June 30, 2018. Comparisons with 2017 are materially affected by the March 2017 Carolina Bank and October 2017 Asheville Savings Bank acquisitions; the acquired businesses are included only from their respective closing dates. Bear Insurance, acquired in September 2017, also contributes to 2018 results.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $51.2m | $39.9m | $101.7m | $74.2m |
| Noninterest income | $16.1m | $11.9m | $32.1m | $21.7m |
| Provision (reversal) for loan losses | $(0.7)m | — | $(4.4)m | $0.7m |
| Noninterest expense | $38.9m | $35.1m | $82.5m | $67.2m |
| Net income available to common shareholders | $22.7m | $11.2m | $43.4m | $18.7m |
| Diluted EPS | $0.77 | $0.45 | $1.46 | $0.80 |
- Margins and drivers: Tax-equivalent net interest margin was 4.10% in Q2 2018 versus 4.08% a year earlier, and 4.15% for the first half versus 4.08%. Higher loan balances, acquisitions, rate increases and acquired-loan discount accretion supported interest income. Q2 loan discount accretion was $2.3m; first-half accretion was $4.4m.
- Income and costs: First-half core noninterest income rose 47.2% to $31.5m, with SBA loan-sale gains increasing to $6.4m from $1.5m. First-half noninterest expense rose to $82.5m, primarily reflecting acquisitions and growth initiatives. The effective tax rate fell to 22.1% from 33.2%, principally following the federal tax-rate reduction.
- Balance sheet at June 30: Assets were $5.72bn, loans $4.15bn, deposits $4.55bn, borrowings $407.1m and shareholders’ equity $724.7m. Loans and deposits were up 22.9% and 25.0%, respectively, year over year, largely due to acquisitions. First-half organic loan growth was $107m; organic deposit growth was $146.7m.
- Cash flow and liquidity: First-half operating cash flow was $(5.0)m; investing cash use was $65.7m and financing cash provided was $141.3m. Cash and cash equivalents ended at $560.1m, up $70.6m from year-end. Liquid assets were 20.2% of deposits and borrowings, versus 18.8% a year earlier. Available unused credit lines totaled $531m.
- Credit quality: The allowance for loan losses was $23.3m, or 0.56% of loans. Nonperforming assets were $51.2m (0.90% of assets), down from $55.0m (1.21%) a year earlier; nonaccrual loans, however, increased to $25.5m from $22.8m. First-half net recoveries were $4.4m, including recoveries on four previously charged-down loans.
- Capital: Common Equity Tier 1, Tier 1 and total risk-based capital ratios were 11.41%, 12.61% and 13.17%, respectively; tangible common equity to tangible assets was 8.59%. Management stated the company exceeded regulatory minimums.
Material changes versus the prior comparable period
- Net income and EPS increased substantially, but acquisition-related balance-sheet and earnings contributions limit direct comparability. Weighted-average diluted shares also increased to 29.6m from 24.7m in Q2 2017.
- Net interest income growth reflected acquisitions and organic loan growth; the margin improved modestly despite higher funding costs.
- Lower credit-loss expense materially supported earnings: the company recorded a first-half loan-loss provision reversal rather than the prior-year provision. Management attributed this to recoveries, lower recent net charge-offs and improving asset quality.
- Available-for-sale securities had $11.6m of net unrealized losses at June 30, versus $2.2m at December 31, 2017; the first-half securities-related other comprehensive loss contributed to a $7.0m total other comprehensive loss.
Outlook, risks and unusual items
- Management expected continued loan-portfolio growth through the remainder of 2018 and projected a fairly stable net interest margin for the rest of the year, assuming one or two additional rate increases. It anticipated higher asset yields alongside pressure to raise deposit rates. These are forward-looking expectations, not guarantees.
- Interest-rate exposure is significant: management reported $1.3bn more interest-bearing liabilities than earning assets repricing within one year, while noting managed-rate deposits may not move in line with market rates. A relatively flat yield curve and competition for quality loans were cited as constraints on pricing and margin.
- Acquired-loan discount accretion is potentially volatile and depends on loan performance and repayments; $25.0m of unaccreted discount remained on acquired accruing loans at June 30.
- The company expects CECL adoption, effective for it after December 15, 2019, to significantly increase its recorded allowance for loan losses. The impact was still under evaluation.
- A $41m money-market deposit received in Q1 was expected to leave the company in Q3 2018. Management considered liquidity adequate for foreseeable operating needs.
- Unusual earnings items included the loan recoveries noted above, a $0.9m Q2 gain primarily from selling a closed branch building, and $1.4m of first-half expense related to an increase in an acquisition earn-out liability. No material pending legal proceedings were reported; management said disclosure controls were effective.
Important facts for investors to verify
- How much of earnings growth is recurring organic performance versus acquisition contributions, SBA loan-sale gains and acquired-loan discount accretion.
- Whether deposit costs rise faster than asset yields, particularly under further rate increases, and whether the anticipated margin stability is achieved.
- The sustainability of recent loan recoveries and the adequacy of the allowance, given rising nonaccrual loans and the expected CECL-related allowance increase.
- The timing and effect of the expected $41m deposit outflow, along with liquidity capacity and funding costs.
- Integration and cost outcomes from the acquisitions, including branch consolidation, amortization, goodwill and earn-out exposures.