Business Context and Reporting Period
Company: First Bancorp (North Carolina)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
First Bancorp operates as a financial holding company with its primary subsidiary, First Bank. The reporting period covers the second quarter of 2010. The company is an Accelerated Filer and is not a shell company. As of July 31, 2010, there were 16,780,703 shares of common stock outstanding. The company remains a participant in the U.S. Treasury's Capital Purchase Program (TARP), holding $65 million in preferred stock issued in January 2009.
Key Financial Metrics
| Metric | Q2 2010 (3 Months) | YTD 2010 (6 Months) | Q2 2009 (3 Months) | YTD 2009 (6 Months) |
|---|---|---|---|---|
| Net Interest Income | $31.5 million | $62.7 million | $23.4 million | $45.6 million |
| Net Income | $3.9 million | $8.4 million | $44.5 million | $48.6 million |
| Net Income Available to Common Shareholders | $2.9 million | $6.3 million | $43.5 million | $46.6 million |
| Diluted EPS (Common) | $0.17 | $0.38 | $2.61 | $2.80 |
| Provision for Loan Losses | $8.0 million | $15.6 million | $3.9 million | $8.4 million |
| Total Assets | $3.32 billion | - | $3.53 billion | - |
| Total Loans | $2.55 billion | - | $2.77 billion | - |
| Total Deposits | $2.79 billion | - | $2.88 billion | - |
| Net Cash Provided by Operating Activities | - | $28.4 million | - | $10.3 million |
| Net Cash Provided by Investing Activities | - | $76.8 million | - | $136.2 million |
| Net Cash Used by Financing Activities | - | ($242.5 million) | - | ($146.3 million) |
Capital Ratios (June 30, 2010): Total Risk-Based Capital Ratio was 16.43% (Minimum required: 8.00%). Tier 1 Leverage Capital Ratio was 10.04% (Minimum required: 4.00%). Tangible Common Equity to Tangible Assets ratio was 6.56%.
Material Changes vs. Prior Period
- Earnings Volatility: Net income available to common shareholders dropped significantly from $43.5 million in Q2 2009 to $2.9 million in Q2 2010. This decline is primarily attributable to a one-time $67.9 million gain on the acquisition of Cooperative Bank recorded in Q2 2009, which did not recur in 2010.
- Net Interest Income Growth: Excluding the acquisition gain, core operations improved. Net interest income increased 34.5% year-over-year in Q2 2010, driven by a higher net interest margin (4.35% in Q2 2010 vs. 3.74% in Q2 2009) and balance sheet growth from the 2009 acquisition.
- Asset Quality Deterioration: Non-covered nonperforming assets increased to $108.2 million (3.89% of non-covered assets) from $53.2 million (1.82%) in Q2 2009. Consequently, the provision for loan losses more than doubled to $8.0 million in Q2 2010 compared to $3.9 million in Q2 2009.
- Balance Sheet Contraction: Total loans decreased 7.8% year-over-year to $2.55 billion, and total deposits decreased 2.8% to $2.79 billion. The deposit decline was largely due to the non-renewal of $117 million in high-cost time deposits, including $73 million in internet time deposits.
- Expense Increase: Noninterest expenses rose 14.3% year-over-year to $22.0 million, primarily due to incremental operating costs from the Cooperative Bank acquisition and collection activities on FDIC-covered assets.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management projects the net interest margin for the remainder of 2010 will remain relatively consistent with recent levels, assuming no changes in interest rates. They expect lower deposit yields as high-yielding time deposits mature, while asset yields may decline due to lower loan balances and higher nonaccrual levels.
- Regulatory Impact: New regulations effective August 15, 2010, regarding debit card overdraft fees are expected to negatively impact noninterest income. The company is soliciting customer opt-ins to mitigate this impact but cannot estimate the precise effect.
- Liquidity Constraints: Borrowing capacity at the Federal Home Loan Bank (FHLB) was reduced from $687 million to approximately $330 million following a collateral audit in January 2010. The audit found that original loan documents were being shredded rather than retained, rendering a significant portion of pledged collateral ineligible.
- Unusual Items:
- Q2 2010: Recorded $1.2 million in write-downs on foreclosed properties covered by FDIC loss sharing agreements due to updated appraisals.
- Q1 2010: Incurred a fraud loss of $0.6 million.
- Q2 2009: Recorded a $67.9 million gain on the acquisition of Cooperative Bank.
- Risks: Key risks include the economic downturn affecting loan demand and collateral values, the uncertainty of cash flows from purchased impaired loans, and the potential for regulatory adjustments to the allowance for loan losses.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-covered nonperforming assets, which have risen to 3.89% of non-covered assets, and the adequacy of the allowance for loan losses (2.01% of non-covered loans).
- Deposit Stability: Assess the impact of the $117 million loss in high-cost time deposits and the company's ability to replace these funds with lower-cost organic deposits.
- Liquidity Capacity: Confirm the current status of the FHLB collateral audit and the company's ability to access the remaining $330 million line of credit versus the previously disclosed $687 million.
- Regulatory Compliance: Monitor the impact of the new debit card overdraft regulations on fee income starting August 2010.
- FDIC Loss Share: Review the status of the FDIC loss share receivable ($118.1 million) and the timing of reimbursements for covered nonperforming assets ($187.2 million).