First Bancorp Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010 for First Bancorp, a North Carolina-based financial holding company. The company operates primarily through its subsidiary, First Bank. A significant portion of the company's balance sheet growth stems from the June 2009 acquisition of Cooperative Bank, which included assets covered by FDIC loss-share agreements. The company is an Accelerated Filer and is not a shell company.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net Income (Total) | $4.44 million | $4.08 million | +8.8% |
| Net Income Available to Common | $3.41 million | $3.14 million | +8.6% |
| Earnings Per Share (Diluted) | $0.20 | $0.19 | +$0.01 |
| Total Assets | $3.39 billion | $2.69 billion | +26.1% |
| Total Loans | $2.61 billion | $2.19 billion | +19.1% |
| Total Deposits | $2.87 billion | $2.14 billion | +34.2% |
| Net Interest Income | $31.18 million | $22.11 million | +41.0% |
| Net Interest Margin | 4.16% | 3.68% | +48 bps |
| Provision for Loan Losses | $7.62 million | $4.49 million | +69.8% |
| Nonperforming Assets (Total) | $285.9 million | $44.7 million | Significant Increase |
| Allowance for Loan Losses | $39.69 million | $31.91 million | +24.4% |
Material Changes vs. Prior Period
- Balance Sheet Growth: Total assets and deposits increased significantly year-over-year, driven almost entirely by the 2009 acquisition of Cooperative Bank. However, on an organic basis (excluding acquisitions), loans decreased by 8.3% and deposits decreased by 2.1% in Q1 2010 due to weak loan demand and the runoff of high-cost internet time deposits.
- Asset Quality Deterioration: Nonperforming assets (NPA) rose to $285.9 million from $44.7 million a year prior. This increase is largely due to the inclusion of Cooperative Bank assets.
- Covered NPAs (FDIC Loss Share): $184.5 million (includes $105.0 million in nonaccrual loans and $68.0 million in other real estate).
- Non-Covered NPAs: $101.4 million (includes $63.4 million in nonaccrual loans and $10.8 million in other real estate).
- Provision for Loan Losses: The provision increased to $7.62 million, primarily driven by higher levels of classified and nonperforming assets in the "non-covered" loan portfolio. Net charge-offs for non-covered loans were $5.28 million (1.01% annualized).
- Expense Increases: Noninterest expenses rose 39.8% to $22.3 million. This was due to incremental costs from the Cooperative acquisition (including $1.0 million in collection activities), a $600,000 fraud loss, and increased FDIC insurance premiums.
Guidance, Outlook, and Risks
- Outlook: Management projects the net interest margin for the remainder of 2010 will remain relatively consistent with recent levels (approx. 4.16%), assuming no changes in interest rates. They expect lower deposit yields as high-yielding time deposits mature, offset by declining asset yields due to lower loan balances and higher nonaccrual levels.
- Liquidity: Liquidity remains adequate. However, available borrowing capacity at the Federal Home Loan Bank (FHLB) was reduced from $687 million to approximately $330 million following a collateral audit that deemed certain loan documents ineligible. Unused lines of credit totaled $286 million at quarter-end.
- Capital: The company remains well-capitalized with a Total Risk-Based Capital Ratio of 15.58% and a Tangible Common Equity ratio of 6.31%. The company holds $65 million in preferred stock issued to the U.S. Treasury under the Capital Purchase Program (TARP), which restricts stock repurchases and dividend increases.
- Risks: Key risks include the economic environment impacting loan losses, the uncertainty of cash flows from acquired impaired loans, and the potential for regulatory adjustments to the allowance for loan losses. The company is also subject to an IRS audit of its 2007 and 2008 tax returns.
Investor Verification Checklist
- FDIC Loss Share Impact: Verify the specific terms and remaining duration of the FDIC loss-share agreement covering $488 million in loans and $68 million in other real estate, as this significantly mitigates risk on a large portion of the balance sheet.
- Non-Covered Asset Quality: Scrutinize the trend in "non-covered" nonperforming assets ($101.4 million) and the adequacy of the allowance for loan losses relative to these specific assets (1.87% coverage ratio).
- FHLB Borrowing Capacity: Confirm the status of the collateral audit resolution and the stability of the reduced $330 million FHLB borrowing line.
- Deposit Runoff: Monitor the continued decline of high-cost internet time deposits and the success of replacing them with lower-cost retail deposits.
- Fraud Loss: Review details regarding the $600,000 fraud loss recorded in Q1 2010 to assess internal control implications.