First Bancorp Reports First Quarter Results

SOUTHERN PINES, N.C., April 29, 2015 /PRNewswire/ -- First Bancorp (NASDAQ - FBNC), the parent company of First Bank, announced today net income available to common shareholders of $6.8 million, or $0.33 per diluted common share, for the three months ended March 31, 2015, an increase of 24.0% compared to the $5.5 million, or $0.27 per diluted common share, recorded in the first quarter of 2014.  The higher earnings were primarily the result of a lower provision for loan losses.

Net Interest Income and Net Interest Margin

Net interest income for the first quarter of 2015 amounted to $29.7 million, a 16.4% decrease from the $35.5 million recorded in the first quarter of 2014. 

The Company's net interest margin (tax-equivalent net interest income divided by average earning assets) in the first quarter of 2015 was 4.19% compared to 5.13% for the first quarter of 2014.  The 4.19% net interest margin was a six basis point decrease from the 4.25% margin realized in the fourth quarter of 2014.  The lower margins are primarily due to lower amounts of discount accretion on loans purchased in failed-bank acquisitions and lower average asset yields – see additional discussion below.  As shown in the accompanying tables, loan discount accretion amounted to $1.6 million in the first quarter of 2015, $2.2 million in the fourth quarter of 2014, and $6.4 million in the first quarter of 2014.  The lower amount of accretion is due to the unaccreted discount amount that resulted from prior acquisitions continuing to wind down.

Excluding the effects of discount accretion on purchased loans, the Company's net interest margin amounted to 3.98% for the first quarter of 2015, 3.96% for the fourth quarter of 2014, and 4.22% for the first quarter of 2014.  The lower margin realized for the first quarter of 2015 compared to the first quarter of 2014 was primarily the result of lower loan yields, which are being impacted by the prolonged low interest rate environment.  The two basis point increase in net interest margin compared to the fourth quarter of 2014 was primarily the result of the Company investing approximately $125 million of excess cash balances into higher yielding investment securities late in the fourth quarter of 2014.  See the Financial Summary for a table that presents the impact of loan discount accretion, as well as other purchase accounting adjustments affecting net interest income. Also see the Financial Summary for a reconciliation of the Company's net interest margin to the net interest margin excluding loan discount accretion, and other information regarding this ratio.  

The Company's cost of funds has steadily declined from 0.31% in the first quarter of 2014 to 0.26% in the first quarter of 2015, which has had a positive impact on the Company's net interest margin.

Provision for Loan Losses and Asset Quality

The Company recorded a negative provision for loan losses (reduction of the allowance for loan losses) of $0.2 million in the first quarter of 2015 compared to a provision for loan losses of $3.6 million in the first quarter of 2014.  As discussed below, the Company records provisions for loan losses related to both non-covered and covered loan portfolios – see explanation of the terms "non-covered" and "covered" in the section below entitled "Note Regarding Components of Earnings."

The provision for loan losses on non-covered loans amounted to $0.1 million in the first quarter of 2015 compared to $3.4 million in the first quarter of 2014. The lower provision recorded in 2015 was primarily a result of improved credit quality trends, minimal loan growth, and generally improving economic trends.

The Company recorded a negative provision for loan losses on covered loans of $0.3 million in the first quarter of 2015 compared to a $0.2 million in provision for loan losses in the first quarter of 2014.  The negative provision in 2015 primarily resulted from lower levels of covered nonperforming loans, declining levels of total covered loans and net loan recoveries (recoveries, net of charge-offs) of $0.2 million realized during the quarter.

Total non-covered nonperforming assets amounted to $90.4 million at March 31, 2015 (2.92% of total non-covered assets), $95.3 million at December 31, 2014 (3.09% of total non-covered assets), and $82.2 million at March 31, 2014 (2.65% of total non-covered assets).  The increase in non-covered nonperforming assets when comparing March 31, 2015 to March 31, 2014 was primarily due to the Company transferring $14.8 million in nonperforming assets from covered status to non-covered status on July 1, 2014 upon the scheduled expiration of a loss share agreement with the FDIC associated with those assets.

Total covered nonperforming assets have declined in the past year, amounting to $14.5 million at March 31, 2015, $18.7 million at December 31, 2014 and $58.9 million at March 31, 2014.  Over the past twelve months, the Company has resolved a significant amount of covered loans and has experienced strong property sales along the North Carolina coast, which is where most of the Company's covered assets are located. Also, as discussed in the preceding paragraph, on July 1, 2014 the Company transferred $14.8 million in nonperforming assets from covered status to non-covered status upon the expiration of a loss share agreement.

Noninterest Income

Total noninterest income for the three months ended March 31, 2015 was $4.5 million compared to $0.3 million for the comparable period of 2014. 

Core noninterest income for the first quarter of 2015 was $7.2 million, a decrease of 3.9% from the $7.5 million reported for the first quarter of 2014.  Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgages, iv) commissions from financial product sales, and v) bank-owned life insurance income.  The primary reason for the decrease in core noninterest income in 2015 was lower service charges on deposit accounts, which declined from $3.6 million in the first quarter of 2014 to $2.9 million in the first quarter of 2015.  After the elimination of free checking for most customers with low balances in late 2013, monthly fees earned on deposit accounts have gradually declined over the past several quarters as a result of more customers meeting the requirements to have the monthly service charge waived.  Fewer instances of fees earned from customers overdrawing their accounts have also impacted this line item.

Noncore components of noninterest income resulted in net losses of $2.6 million in the first quarter of 2015 and net losses of $7.2 million in the first quarter of 2014.  The largest variances in noncore noninterest income related to gains (losses) on covered foreclosed properties and indemnification asset income (expense) – see discussion below.

Gains on covered foreclosed properties were $0.2 million for the three months ended March 31, 2015 compared to losses of $2.1 million recorded for the three months ended March 31, 2014.  Losses on covered foreclosed properties have generally declined in recent quarters as a result of significantly lower levels of covered foreclosed properties held by the Company and stabilization in property values.

Indemnification asset income (expense) is recorded to reflect additional (decreased) amounts expected to be received from the FDIC during the period related to covered assets.  The three primary items that result in recording indemnification asset income (expense) are 1) income from loan discount accretion, which results in indemnification expense, 2) provisions for loan losses on covered loans, which result in indemnification income and 3) foreclosed property gains (losses) on covered assets, which also result in indemnification expense (income).  In the first quarter of 2015, the Company recorded $2.4 million in indemnification asset expense compared to $4.9 million in indemnification asset expense in the first quarter of 2014.  This variance is primarily due to lower indemnification asset expense associated with the lower loan discount accretion income in the first quarter of 2015.  See additional discussion related to this matter in the section below entitled "Note Regarding Components of Earnings."

Noninterest Expenses

Noninterest expenses amounted to $23.7 million in the first quarter of 2015 compared to $23.6 million recorded in the first quarter of 2014.  In 2015, a lower level of salary expense, resulting from a decline in the number of employees, was offset by miscellaneous items of other operating expense.

Balance Sheet and Capital

Total assets at March 31, 2015 amounted to $3.2 billion, a 2.9% decrease from a year earlier.  Total loans at March 31, 2015 amounted to $2.4 billion, a 2.1% decrease from a year earlier, and total deposits amounted to $2.7 billion at March 31, 2015, a 3.3% decrease from a year earlier. 

Investment securities totaled $349.0 million at March 31, 2015 compared to $234.1 million at March 31, 2014.  In the fourth quarter of 2014, the Company used a portion of its excess cash balances to purchase approximately $125 million in investment securities.

Non-covered loans amounted to $2.3 billion at March 31, 2015, an increase of $18.8 million from March 31, 2014.  The increase was due to the reclassification of $39.7 million in loans from covered status to non-covered status in connection with the July 1, 2014 expiration of a loss share agreement.  Non-covered loans increased $7 million during the first quarter of 2015 as a result of ongoing internal initiatives to drive loan growth.  Loans covered by FDIC loss share agreements are expected to continue to decline as those loans continue to pay down.

The lower amount of deposits at March 31, 2015 compared to March 31, 2014 was primarily due to declines in retail time deposits ("other time deposits > $100,000" and "other time deposits" in the accompanying tables) and brokered deposits, with increases in checking accounts offsetting a large portion of the decline.  Time deposits are generally one of the Company's most expensive funding sources, and thus the shift from this category has benefited the Company's overall cost of funds.

The Company remains well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at March 31, 2015 of 17.66% compared to the 10.00% minimum to be considered well-capitalized.  The Company's tangible common equity to tangible assets ratio was 8.08% at March 31, 2015, an increase of 78 basis points from a year earlier.

Comments of the President and Other Business Matters

Richard H. Moore, President and CEO of First Bancorp, commented on today's report, "I am pleased to report another quarter of strong earnings for the Company.  We have now reported eight consecutive quarters of earnings of more than $5 million.  Asset quality continues to improve and we are focused on strategic initiatives that we expect will result in future increases in profitability and market share."

The following is a list of business development and other miscellaneous matters affecting the Company:

• On March 16, 2015, the Company announced a quarterly cash dividend of $0.08 cents per share payable on April 24, 2015 to shareholders of record on March 31, 2015.  This is the same dividend rate as the Company declared in the first quarter of 2014.
• The Company is currently constructing a new branch facility at 4110 Bradham Drive, Jacksonville, North Carolina.  Upon completion, the First Bank branch located on Western Boulevard will be closed and the accounts serviced at that branch will be reassigned to the new and improved branch.  This is expected to occur in the second quarter of 2015.

Note Regarding Components of Earnings

The Company's results of operation are significantly affected by the on-going accounting for two FDIC-assisted failed bank acquisitions.  In the discussion above, the term "covered" is used to describe assets included as part of FDIC loss share agreements, which generally result in the FDIC reimbursing the Company for 80% of losses incurred on those assets.  The term "non-covered" refers to the Company's legacy assets, which are not included in any type of loss share arrangement.

For covered loans that deteriorate in terms of repayment expectations, the Company records immediate allowances through the provision for loan losses.  For covered loans that experience favorable changes in credit quality compared to what was expected at the acquisition date, including loans that pay off, the Company records positive adjustments to interest income over the life of the respective loan – also referred to as loan discount accretion.  For covered foreclosed properties that are sold at gains or losses or that are written down to lower values, the Company records the gains/losses within noninterest income. 

The adjustments discussed above are recorded within the income statement line items noted without consideration of the FDIC loss share agreements.  Because favorable changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those expectations.  The net increase or decrease in the indemnification asset is reflected within noninterest income.

The adjustments noted above can result in volatility within individual income statement line items.  Because of the FDIC loss share agreements and the associated indemnification asset, pretax income resulting from amounts recorded as provisions for loan losses on covered loans, discount accretion, and losses from covered foreclosed properties is generally only impacted by 20% of these amounts due to the corresponding adjustments made to the indemnification asset.

First Bancorp is a bank holding company headquartered in Southern Pines, North Carolina with total assets of approximately $3.2 billion.  Its principal activity is the ownership and operation of First Bank, a state-chartered community bank that operates 87 branches, with 73 branches operating in North Carolina, 6 branches in South Carolina (Cheraw, Dillon, Florence, and Latta), and 7 branches in Virginia (Abingdon, Blacksburg, Christiansburg, Fort Chiswell, Radford, Salem and Wytheville), where First Bank does business as First Bank of Virginia. First Bank also has loan production offices in Fayetteville, North Carolina, and Greenville, North Carolina. First Bancorp's common stock is traded on the NASDAQ Global Select Market under the symbol "FBNC."

Please visit our website at www.LocalFirstBank.com.

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties.  Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgments of the Company and its management about future events.  Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, the Company's level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions.  For additional information about the factors that could affect the matters discussed in this paragraph, see the "Risk Factors" section of the Company's most recent annual report on Form 10-K available at www.sec.gov.  Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise forward-looking statements.  The Company is also not responsible for changes made to the press release by wire services, internet services or other media.

 

 

 

 

 

 

 

Note:  The measure "tax-equivalent net interest margin, excluding impact of loan discount accretion" is a non-GAAP performance measure.  Management of the Company believes that it is useful to calculate and present the Company's net interest margin without the impact of loan discount accretion for the reasons explained in the remainder of this paragraph.  Loan discount accretion is a non-cash interest income adjustment related to the Company's acquisition of two failed banks and represents the portion of the fair value discount that was initially recorded on the acquired loans that is being recognized into income over the lives of the loans.  At March 31, 2015, the Company had a remaining loan discount balance of $19.1 million compared to $31.2 million at March 31, 2014.  For the related loans that perform and pay-down over time, the loan discount will also be reduced, with a corresponding increase to interest income.  Therefore management of the Company believes it is useful to also present this ratio to reflect the Company's net interest margin excluding this non-cash, temporary loan discount accretion adjustment to aid investors in comparing financial results between periods.  The Company cautions that non-GAAP financial measures should be considered in addition to, but not as a substitute for, the Company's reported GAAP results.

 

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SOURCE First Bancorp