First Bancorp — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. First Bancorp is a North Carolina-based bank holding company. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial performance and condition
- Q2 earnings: Net income was $5.6 million, or $0.27 per diluted share, versus $3.3 million, or $0.15, in Q2 2012. Net income available to common shareholders was $5.4 million versus $2.5 million.
- First-half earnings: Net income was $8.7 million, or $0.41 per diluted share, compared with a $1.9 million net loss, or a $0.21 loss per diluted share, in first-half 2012. Common earnings were $8.2 million versus a $3.5 million loss.
- Net interest income and margin: Q2 net interest income rose 8.0% to $35.6 million; first-half net interest income rose 3.8% to $67.5 million. Tax-equivalent net interest margin was 5.10% in Q2 versus 4.68%, and 4.90% for the first half versus 4.64%. Purchased-loan discount accretion contributed $6.5 million to Q2 net interest income and $10.1 million in the first half, versus $3.2 million and $5.7 million, respectively, in 2012. Total cost of funds fell to 0.41% in Q2 from 0.62%.
- Credit costs and noninterest items: Provision for loan losses was $5.6 million in Q2 and $16.7 million for the first half, versus $6.5 million and $28.0 million in 2012. Q2 noninterest income was $4.5 million (including $7.2 million in core income offset by noncore losses); noninterest expense was $25.8 million. First-half noninterest income was $11.6 million and expense was $49.0 million.
- Cash flow: First-half operating cash flow was $37.7 million, investing cash flow was positive $22.7 million, and financing cash flow was negative $64.2 million. Cash and cash equivalents declined $3.9 million to $237.6 million.
- Balance sheet at June 30: Assets were $3.25 billion, loans $2.43 billion, deposits $2.82 billion, borrowings $46.4 million, and shareholders’ equity $360.1 million. Allowance for loan losses was $50.9 million, or 2.09% of loans.
- Capital and liquidity: Total risk-based capital ratio was 16.58%, Tier 1 risk-based ratio 15.32%, leverage ratio 10.63%, and tangible common equity to tangible assets 6.93%. Unused available credit lines totaled $332 million; liquid assets were 16.7% of deposits and borrowings. Management said liquidity was adequate for foreseeable operating needs.
Material changes versus comparable periods
- Profitability improved substantially, primarily reflecting lower loan-loss provisions and foreclosed-property losses, higher net interest income, and higher purchase-accounting accretion.
- Total assets were 2.4% lower year over year; loans were down 0.3% and deposits down 0.7%. Non-covered loans grew internally, while covered loans continued to run off. Transaction deposits grew and higher-cost time deposits declined.
- Total nonperforming assets fell to $168.2 million from $261.5 million a year earlier and $202.4 million at December 31, 2012. However, total nonaccrual loans rose to $92.7 million from $66.5 million at year-end; both covered and non-covered nonaccrual balances increased.
- First-half net charge-offs declined to $12.3 million from $16.0 million. Foreclosed real estate declined to $47.4 million from $73.6 million at year-end, reflecting sales activity and prior write-downs.
- On March 22, the company acquired two North Carolina branches, adding approximately $57 million of deposits and $16 million of loans. It also completed the January sale of approximately $30 million of loans previously written down and classified as held for sale.
Outlook, commentary, and risks
- Management projected some net interest margin compression for the remainder of 2013, citing expected pressure on loan yields and limited room to reduce deposit costs further. The filing does not provide formal earnings guidance.
- Management reported improving loan demand and cited 7.7% annualized internal growth in non-covered loans, excluding acquired loans, since year-end 2012. It also noted competition for high-quality loans was limiting its ability to raise loan pricing.
- Loan discount accretion is uncertain and may vary materially with credit performance and repayment pace; deteriorating acquired-loan credit quality could reduce future accretion. The company’s FDIC loss-share arrangements generally reimburse 80% of eligible losses, but related indemnification estimates and timing remain subject to change. One commercial loss-share agreement expires in June 2014.
- Q2 expenses included approximately $1.6 million of severance costs associated with employee departures, including the former CEO. The company froze both defined-benefit pension plans effective December 31, 2012; pension income reduced expense in 2013 compared with pension expense in 2012.
- Interest-rate exposure is material: the filing reports approximately $823 million more interest-bearing liabilities than earning assets repricing within one year, while management’s modeled near-term outlook anticipated no significant downward pressure from rising rates. Results remain sensitive to rate movements, funding costs, credit quality, collateral values, economic conditions, regulatory reviews, and estimates for loan-loss reserves and FDIC recoveries.
- The company reported no material legal proceedings, no derivative activity, and effective disclosure controls. It stated that it was well-capitalized under regulatory standards.
Important facts for investors to verify
- How much future earnings depend on purchase-accounting loan accretion, and whether that accretion is sustainable.
- Whether rising nonaccrual loans, classified loans, and covered-loan deterioration lead to higher provisions or lower FDIC recoveries.
- Whether nonperforming-asset reductions reflect durable credit improvement versus loan sales, charge-offs, write-downs, and asset dispositions.
- Whether loan growth and transaction-deposit growth continue while time deposits and funding costs remain controlled.
- Progress on margin performance, severance and other expense trends, and the company’s liquidity and capital ratios.