FIRST BANCORP quarterly report, Q2 FY2012

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First Bancorp — Q2 2012 Form 10-Q

Business context and period. First Bancorp is a North Carolina-based bank holding company. This unaudited report covers the quarter and six months ended June 30, 2012; balance-sheet comparisons include June 30, 2011 and December 31, 2011. The company’s results include assets from two FDIC-assisted acquisitions, with certain acquired loans and foreclosed properties covered by FDIC loss-share agreements.

Financial results and condition

  • Q2 earnings: Net income was $3.29 million, versus $3.73 million in Q2 2011. Income available to common shareholders was $2.46 million, or $0.15 per diluted share, versus $2.69 million, or $0.16 per diluted share.
  • First-half earnings: Net loss was $1.89 million, compared with net income of $10.10 million in the first half of 2011. The loss available to common shareholders was $3.48 million, or $0.21 per diluted share, versus income of $8.02 million, or $0.48 per diluted share.
  • Interest income and margin: Q2 interest income was $37.45 million and net interest income was $32.95 million, down 4.4% from Q2 2011. Tax-equivalent net interest margin was 4.68%, versus 4.92%. First-half net interest income was $65.04 million, down 2.6%; tax-equivalent margin was 4.64%, versus 4.77%. Management attributed the lower margin mainly to weaker loan yields and a greater share of lower-yielding short-term investments.
  • Credit costs and noninterest income: Loan-loss provision was $6.47 million in Q2, down from $10.93 million, but $28.02 million for the first half, up from $22.28 million. Noninterest income was $1.77 million in Q2 versus $5.11 million, and $7.12 million for the first half versus $19.31 million. Q2 foreclosed-property losses and write-downs totaled $7.87 million, including $6.55 million on covered properties.
  • Expenses and cash flow: Noninterest expense was $23.45 million in Q2, up 2.3%; first-half expense was $47.82 million, down 0.3%. First-half operating cash flow was $26.60 million, investing cash flow was negative $20.36 million, and financing cash flow was positive $39.78 million. Cash and cash equivalents rose $46.02 million to $262.19 million.
  • Balance sheet and funding: Total assets were $3.33 billion; total loans were $2.44 billion and deposits were $2.84 billion at June 30. Year over year, assets were down 0.1%, loans down 0.2%, and deposits up 3.3%. Non-covered loans grew 3.6% year over year while covered loans declined 19.6%. Borrowings were $111.39 million; repurchase-agreement balances were zero.
  • Credit quality: Total nonperforming assets were $261.48 million, or 7.86% of assets, versus $284.58 million and 8.54% a year earlier. Non-covered nonperforming assets increased to $132.50 million from $120.31 million a year earlier; covered nonperforming assets declined to $128.98 million from $164.27 million. The allowance for loan losses was $53.45 million, 2.19% of loans, versus $40.01 million and 1.64% a year earlier. First-half net charge-offs were $15.99 million, down from $31.70 million.
  • Capital and liquidity: Total risk-based capital was 16.23%, Tier 1 risk-based capital 14.96%, and Tier 1 leverage 9.98%. The company reported a 6.36% tangible common equity-to-tangible assets ratio. Available unused credit lines totaled $327 million; cash and securities were 16.6% of deposits and borrowings, versus 15.8% a year earlier.

Material changes, outlook, and risks

  • The first-half 2012 loss chiefly reflected a higher Q1 provision on non-covered loans. Management said an internal review applied more conservative loss assumptions to about 30 loan relationships and resulted in approximately $11 million of additional provisions. Q2 provision declined as loss assessments stabilized.
  • The first-half 2011 comparison benefited from a $10.2 million bargain-purchase gain on the Bank of Asheville acquisition, with a reported after-tax impact of $6.2 million, or $0.37 per diluted share.
  • Management expected net interest margin for the remainder of 2012 to remain relatively consistent with recent levels, while loan yields and deposit costs were expected to continue trending down. It did not provide earnings guidance. Management expected no material near-term improvement or deterioration in non-covered nonperforming assets and expected covered nonperforming assets to continue declining as assets are resolved or disposed of.
  • Management cited high unemployment and declining local property values as continuing credit risks, particularly for real-estate-related lending. Non-covered nonperforming assets were about 4.51% of non-covered assets. The filing cautions that allowance estimates depend on judgments and may require future adjustments, including in response to regulatory examinations.
  • FDIC loss-share accounting affects reported provisions, foreclosed-property losses, indemnification income, and loan discount accretion. Management said purchase-accounting accretion is difficult to predict and may vary materially with loan credit quality and repayment timing. The FDIC indemnification asset was $116.90 million at June 30, 2012.
  • Interest-rate risk includes $594 million more interest-bearing liabilities than earning assets repricing within one year under the filing’s stated maturity analysis. Management’s modeling indicated no likely significant near-term downward pressure on net interest income from rising rates, but results remain sensitive to repricing behavior and assumptions.
  • The $63.5 million Treasury SBLF preferred stock remained outstanding. The filing’s note projected a 5.0% dividend rate for the period ending September 30, subject to Treasury confirmation; MD&A separately stated an expected third-quarter rate of 4.3%. This discrepancy should be checked against the underlying filing or subsequent disclosure.
  • First Bank had agreed to assume deposits and acquire certain loans from a Gateway Bank & Trust branch, subject to regulatory approval and expected in Q3 2012. A proposed Waccamaw Bank branch transaction was terminated after that bank was closed and placed in FDIC receivership. The company reported no legal proceedings expected to have a material effect and no derivative activity.

Important facts for investors to verify

  • Reconcile the stated SBLF preferred dividend rate for Q3 2012: 5.0% in Note 14 versus 4.3% in MD&A.
  • Track whether elevated non-covered provisions and nonperforming assets lead to further allowance increases, charge-offs, or foreclosed-property losses.
  • Assess the assumptions underlying the approximately $11 million additional provision and the company’s estimate that reserves are adequate.
  • Monitor FDIC indemnification-asset collectability, loss-share claim timing, and the effect of acquired-loan discount accretion on earnings.
  • Review capital and liquidity trends, including SBLF preferred dividends, borrowing capacity, deposit composition, and the execution of the Gateway transaction.