First Bancorp Reports Third Quarter Results

SOUTHERN PINES, N.C., Oct. 30, 2014 /PRNewswire/ -- First Bancorp FBNC, the parent company of First Bank, announced today net income available to common shareholders of $5.4 million, or $0.27 per diluted common share, for the three months ended September 30, 2014, a decrease of 12.3% compared to the $6.1 million, or $0.30 per diluted common share, recorded in the third quarter of 2013.  The earnings for the third quarter of 2014 were impacted by $0.8 million in non-covered foreclosed property losses and $0.9 million in charges associated with a previously announced plan to close ten bank branches, which negatively impacted diluted earnings per share by a combined $0.05.

For the nine months ended September 30, 2014, the Company recorded net income available to common shareholders of $17.3 million, or $0.85 per diluted common share, an increase of 20.3% compared to the $14.3 million, or $0.71 per diluted common share, for the nine months ended September 30, 2013.  The higher earnings were primarily the result of lower provisions for loan losses.

Net Interest Income and Net Interest Margin

Net interest income for the third quarter of 2014 amounted to $31.3 million, a 7.1% decrease from the $33.7 million recorded in the third quarter of 2013.  Net interest income for the first nine months of 2014 amounted to $100.7 million, a 0.6 % decrease from the $101.3 million recorded in the comparable period of 2013.

The Company's net interest margin (tax-equivalent net interest income divided by average earning assets) in the third quarter of 2014 was 4.30% compared to 4.84% for the third quarter of 2013.  For the nine month period ended September 30, 2014, the Company's net interest margin was 4.69% compared to 4.88% for the same period in 2013.  The 4.30% net interest margin for the third quarter of 2014 was a 35 basis point decrease from the 4.65% margin realized in the second quarter of 2014.  The lower margin realized in the third quarter of 2014 was primarily due to a lower amount 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 $2.6 million in the third quarter of 2014, $4.9 million in the second quarter of 2014, and $4.3 million in the third quarter of 2013.  For the first nine months of 2014, loan discount accretion amounted to $13.8 million compared to $14.6 million for the first nine months of 2013.

Excluding the effects of discount accretion on purchased loans, the Company's net interest margin amounted to 3.95% for the third quarter of 2014, 3.99% for the second quarter of 2014, and 4.23% for the third quarter of 2013.  The lower margins realized during the second and third quarters of 2014 were due primarily to lower loan yields and a higher mix of the Company's earning assets being maintained in highly liquid accounts that earn relatively little interest.  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 0.37% in the third quarter of 2013 to 0.28% in the third quarter of 2014, which has had a positive impact on the Company's net interest margin.

Provision for Loan Losses and Asset Quality

The Company recorded total provisions for loan losses of $1.5 million in the third quarter of 2014 compared to $5.0 million for the third quarter of 2013.  For the nine months ended September 30, 2014, the Company recorded total provisions for loan losses of $8.7 million compared to $21.7 million for the same period of 2013.  As discussed below, lower provisions in 2014 were recorded for both the 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 $1.3 million in the third quarter of 2014 compared to $3.5 million in the third quarter of 2013.  For the first nine months of 2014, the provision for loan losses on non-covered loans amounted to $5.8 million compared to $13.3 million for the same period of 2013.  The lower provisions recorded in 2014 have been primarily a result of stable asset quality trends.

The provision for loan losses on covered loans amounted to $0.2 million in the third quarter of 2014 compared to $1.5 million in the third quarter of 2013.  For the nine months ended September 30, 2014, the provision for loan losses on covered loans amounted to $2.9 million compared to $8.4 million for the same period of 2013.  The decreases in 2014 have been primarily due to lower levels of covered nonperforming loans during the period, stabilization in the underlying collateral values of nonperforming loans, and a $1.9 million recovery that the Company realized in the first quarter of 2014.

Total non-covered nonperforming assets amounted to $96.8 million at September 30, 2014 (3.17% of total non-covered assets), $84.1 million at June 30, 2014 (2.73% of total non-covered assets) and $83.5 million at September 30, 2013 (2.86% of total non-covered assets).  The increase in the third quarter of 2014 was 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 sharing agreement with the FDIC associated with those assets – see additional discussion below. 

Total covered nonperforming assets have declined in the past year, amounting to $20.0 million at September 30, 2014 compared to $39.1 million at June 30, 2014 and $83.0 million at September 30, 2013.  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, during the third quarter of 2014 the Company transferred $14.8 million in nonperforming assets from covered status to non-covered status.

Noninterest Income

Total noninterest income for the three months ended September 30, 2014 was $4.6 million compared to $5.6 million for the comparable period of 2013.  For the nine months ended September 30, 2014, noninterest income amounted to $9.9 million compared to $17.2 million for the nine months ended September 30, 2013.

Core noninterest income for the third quarter of 2014 was $7.8 million, an increase of 3.2% over the $7.5 million reported for the third quarter of 2013.  For the first nine months of 2014, core noninterest income amounted to $23.1 million, an 8.8% increase from the $21.2 million recorded in the comparable period of 2013. 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 factors that resulted in the increases in core noninterest income in 2014 were higher service charges on deposit accounts and higher debit and credit card interchange fees.  Service charges on deposit accounts have increased primarily as a result of the December 2013 introduction of a new deposit product line-up that altered the fee structure of many accounts.  The increase in debit and credit card interchange fees is due to growth in the number and usage of debit and credit cards.

Noncore components of noninterest income resulted in net losses of $3.2 million in the third quarter of 2014 compared to net losses of $1.9 million in the third quarter of 2013.  For the nine months ended September 30, 2014 and 2013, the Company recorded net losses of $13.2 million and $4.0 million, respectively, related to the noncore components of noninterest income.  The largest variances related to foreclosed property gains/losses and indemnification asset income (expense) – see discussion below.

The Company experienced losses on non-covered foreclosed properties of $0.8 million and $1.5 million for the three and nine months ended September 30, 2014, respectively, compared to gains of $0.2 million and $1.7 million for the same periods of 2013.  In the third quarter of 2014, the Company recorded write-downs on several of its properties, while in the second quarter of 2014, the Company had a significant write-down associated with one property.  In 2013, the Company experienced several large gains related to the sale of properties along the North Carolina coast that had recovered in value.

Gains on covered foreclosed properties were $0.8 million and $1.4 million for the three months ended September 30, 2014 and 2013, respectively, while losses of $2.5 million and $3.7 million were recorded for the nine months ended September 30, 2014 and 2013, respectively.  Losses on covered foreclosed properties have generally declined over the past several years as a result of stabilization in property values and declining numbers of foreclosed properties held by the Company.

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 third quarter of 2014, the Company recorded $3.2 million in indemnification asset expense compared to $3.8 million in indemnification asset expense in the third quarter of 2013.  The variance between the third quarter of 2014 and the third quarter of 2013 is primarily due to lower indemnification asset expense associated with the lower loan discount accretion income recorded.  For the nine months ended September 30, 2014, indemnification asset expense amounted to $9.7 million compared to indemnification asset expense of $2.3 million for the same period of 2013.  In 2014, the indemnification asset expense recorded in connection with loan discount accretion was offset to a lesser degree by the indemnification asset income associated with loan/foreclosed property losses than was the case in the first nine months of 2013.  See additional discussion related to this matter in the section below entitled "Note Regarding Components of Earnings."

During the nine months ended September 30, 2014 and 2013, the Company realized $0.8 million and $0.6 million in securities gains, respectively.

Noninterest Expenses

Noninterest expenses amounted to $25.9 million in the third quarter of 2014 compared to $23.7 million recorded in the third quarter of 2013.  Noninterest expenses for the nine months ended September 30, 2014 amounted to $74.3 million compared to $72.7 million recorded in the first nine months of 2013.  Included in noninterest expenses for the three and nine months ended September 30, 2014 were $0.9 million in charges related to the previously announced plan to close and consolidate ten bank branches.

Balance Sheet and Capital

Total assets at September 30, 2014 amounted to $3.2 billion, a 0.7% increase from a year earlier.  Total loans at September 30, 2014 amounted to $2.4 billion, a 0.7% decrease from a year earlier, and total deposits amounted to $2.7 billion at September 30, 2014, a 2.3% decrease from a year earlier. 

Non-covered loans amounted to $2.3 billion at September 30, 2014, an increase of $35.3 million since June 30, 2014.  In the third quarter of 2014, the Company reclassified $39.7 million in loans from covered status to non-covered status in connection with the July 1, 2014 expiration of a loss-sharing agreement (see additional discussion below).  Excluding the transfer, the amount of non-covered loans has been relatively unchanged since December 31, 2013, as strong competition in the marketplace has impacted loan growth.

The lower amount of deposits at September 30, 2014 compared to September 30, 2013 was primarily due to declines in retail time deposits (called "other time deposits" and "other time deposits > $100,000" in the accompanying tables), with increases in non-interest bearing checking accounts offsetting a large portion of the decline.  Retail time deposits are generally one of the Company's most expensive funding sources, and thus the shift from this category benefited the Company's overall cost of funds.

The Company obtained $70 million in new borrowings in the first quarter of 2014 from a low cost funding source in order to offset declines in time deposit balances, and in anticipation of future loan growth.  At September 30, 2014, borrowings totaled $116.4 million, compared to $46.4 million a year earlier.

The Company remains well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at September 30, 2014 of 17.27% compared to the 10.00% minimum to be considered well-capitalized.  The Company's tangible common equity to tangible assets ratio was 7.86% at September 30, 2014, an increase of 67 basis points from a year earlier.

Expiration of Loss-Share Agreement with the FDIC

The Company's loss-sharing agreement with the FDIC related to non-single family loans and foreclosed properties that were assumed in a failed bank acquisition in 2009 expired on July 1, 2014.  The Company bears all future losses on these assets; however, at present, management does not expect such losses will be materially in excess of related loan loss allowances.  The following presents information related to these assets as of July 1, 2014, which were transferred to the "non-covered" categories on that date.

The Company continues to have three loss-sharing agreements with the FDIC in place.  The next agreement that expires does so on April 1, 2016.

Comments of the President and Other Business Matters

Richard H. Moore, President and CEO of First Bancorp, commented on today's report, "Today's earnings report reflects another strong quarter for our company, with year to date earnings up over 20% compared to last year.  Asset quality continues to improve, and we are undertaking initiatives that we believe will improve efficiency in the future."

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

• On August 27, 2014, the Company announced the planned closure and consolidation of ten of its branches.  All branches will be consolidated with other First Bank branches near the closing location. Subject to regulatory approval, nine of the branches will close on December 5, 2014, with the closure of the remaining branch to occur at a later date.
  
  
• On September 15, 2014, the Company announced a quarterly cash dividend of $0.08 cents per share payable on October 24, 2014 to shareholders of record on September 30, 2014.  This is the same dividend rate as the Company declared in the third quarter of 2013.
  
  
• 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 first quarter of 2015 and is subject to regulatory approval.

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 payoff, 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 96 branches, with 81 branches operating in North Carolina, 7 branches in South Carolina (Cheraw, Dillon, Florence, and Latta), and 8 branches in Virginia (Abingdon, Blacksburg, Christiansburg, Dublin, 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.

 

 

 

 

 

 

 

 

 

 

 

 

SOURCE First Bancorp