Business Context and Reporting Period
Company: First Bancorp
Filing Type: Form 10-Q
Period Ended: September 30, 2009
Overview: First Bancorp is a North Carolina-based financial holding company. The reporting period is significantly impacted by the June 19, 2009, acquisition of Cooperative Bank (FDIC-assisted transaction), which added approximately $959 million in assets and $706 million in deposits. The company also participated in the U.S. Treasury's Capital Purchase Program (TARP) in January 2009, issuing $65 million in preferred stock.
Key Financial Metrics
| Metric | Q3 2009 (3 Months) | Q3 2008 (3 Months) | YTD 2009 (9 Months) | YTD 2008 (9 Months) |
|---|---|---|---|---|
| Net Income (Total) | $6.38 million | $6.20 million | $51.48 million | $17.00 million |
| Net Income Available to Common | $5.39 million | $6.20 million | $48.52 million | $17.00 million |
| Diluted EPS (Common) | $0.32 | $0.37 | $2.91 | $1.07 |
| Net Interest Income | $30.51 million | $22.79 million | $76.06 million | $64.05 million |
| Net Interest Margin | 3.87% | 3.79% | 3.78% | 3.76% |
| Provision for Loan Losses | $5.20 million | $2.85 million | $13.61 million | $6.44 million |
| Total Assets | $3.52 billion | $2.70 billion | Balance Sheet Data | |
| Total Loans | $2.70 billion | $2.21 billion | ||
| Total Deposits | $2.92 billion | $2.02 billion | Balance Sheet Data | |
| Shareholders' Equity | $332.87 million | $219.35 million | ||
| Cash & Equivalents | $284.09 million | $178.71 million | Balance Sheet Data | |
| Allowance for Loan Losses | $34.44 million | $27.93 million |
Material Changes vs. Prior Period
- Acquisition Impact: The acquisition of Cooperative Bank drove a 30.3% increase in total assets and a 44.4% increase in total deposits compared to September 2008. Loans increased 21.9% year-over-year, primarily due to the acquisition.
- Acquisition Gain: A one-time gain of $62.1 million was recorded in the second quarter of 2009 related to the Cooperative Bank acquisition. This gain was retrospectively adjusted upward from an initial $53.8 million estimate due to favorable third-party appraisals of collateral and loan payoffs.
- Asset Quality Deterioration: Nonperforming assets (NPAs) rose significantly to $180.9 million (5.14% of total assets) from $28.1 million in September 2008. However, $115.4 million of these NPAs are "covered" by FDIC loss share agreements. Non-covered NPAs were $65.5 million (2.21% of non-covered assets).
- Provision Increase: The provision for loan losses more than doubled year-over-year for the nine-month period ($13.6 million vs. $6.4 million), driven by deteriorating asset quality in the non-covered loan portfolio.
- Capital Structure: The company issued $65 million in Series A preferred stock to the U.S. Treasury in January 2009. Preferred dividends and accretion reduced net income available to common shareholders by approximately $3.0 million for the nine months ended September 30, 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects the acquisition gain to remain subject to refinement for up to one year post-closing. The company anticipates a steady decline in high-cost internet deposits acquired from Cooperative Bank as they mature, intending to replace them with lower-cost retail or brokered deposits.
- Dividend Policy: The quarterly common dividend was reduced to $0.08 per share (from $0.19 in Q3 2008) to conserve capital in light of economic conditions.
- Share Repurchases: No shares were repurchased in the first nine months of 2009. Repurchases are currently prohibited without Treasury permission due to TARP participation.
- Key Risks:
- Acquisition Accounting: The $62.1 million acquisition gain could be retroactively decreased if fair value estimates of assets or liabilities are adjusted downward within the one-year measurement period.
- Asset Quality: Continued economic recession may lead to further increases in loan losses and nonperforming assets, particularly in the non-covered portfolio.
- Interest Rate Risk: The company is asset-sensitive in the short term but has more interest-bearing liabilities repricing within one year than earning assets, creating potential downward pressure on net interest income in a rising rate environment.
Investor Verification Checklist
- Acquisition Gain Stability: Verify if the $62.1 million gain from the Cooperative Bank acquisition is adjusted in future filings as fair value estimates are finalized.
- Non-Covered Asset Quality: Monitor the trend of non-covered nonperforming assets ($65.5 million) and the adequacy of the allowance for loan losses relative to this specific portfolio, as FDIC protection does not apply here.
- Deposit Cost Management: Track the run-off of high-cost internet and brokered deposits acquired from Cooperative Bank and the success of replacing them with lower-cost funding.
- TARP Restrictions: Confirm the timeline for redeeming the $65 million preferred stock to lift restrictions on share repurchases and dividend increases.
- Provision Trends: Assess whether the elevated provision for loan losses ($13.6 million YTD) stabilizes as the non-covered loan portfolio is managed.