First Bancorp — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are primarily with March 31, 2012 and December 31, 2012. First Bancorp is a North Carolina bank holding company. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / date |
|---|---|---|
| Net interest income | $31.9 | $32.1 in Q1 2012 |
| Net interest margin, tax-equivalent | 4.69% | 4.59% in Q1 2012; 5.01% in Q4 2012 |
| Provision for loan losses | $11.1 | $21.6 in Q1 2012 |
| Noninterest income | $7.1 | $5.3 in Q1 2012 |
| Noninterest expense | $23.2 | $24.4 in Q1 2012 |
| Income before taxes / net income | $4.7 / $3.1 | $(8.5) / $(5.2) in Q1 2012 |
| Net income available to common shareholders; diluted EPS | $2.9; $0.14 | $(5.9); $(0.35) in Q1 2012 |
| Operating cash flow | $17.0 | $(1.0) in Q1 2012 |
| Total assets | $3,280.9 | $3,337.0 at March 31, 2012 |
| Total loans / deposits | $2,396.2 / $2,857.6 | $2,436.6 / $2,831.1 at March 31, 2012 |
| Cash and cash equivalents | $316.3 | $293.3 at March 31, 2012 |
| Borrowings | $46.4 | $133.9 at March 31, 2012 |
| Shareholders’ equity | $357.2 | $338.4 at March 31, 2012 |
The allowance for loan losses was $49.8 million, or 2.08% of loans. Net charge-offs were $7.8 million; annualized net charge-offs were 1.32% of average loans. Total nonperforming assets were $175.4 million (5.35% of assets), down from $202.4 million at year-end 2012 and $252.2 million a year earlier. Total risk-based capital was 16.82%, and the tangible common equity-to-tangible assets ratio was 6.76%. Management reported $346 million of unused available credit lines and liquid assets equal to 18.7% of deposits and borrowings. The common dividend was $0.08 per share.
Material changes and operating developments
- Return to profitability was primarily driven by a substantially lower loan-loss provision than in Q1 2012; net interest income was slightly lower.
- Net interest margin improved year over year, aided by acquired-loan discount accretion and lower funding costs, but fell 32 basis points from Q4 2012 as discount accretion declined. Loan discount accretion was $3.7 million in Q1 2013 versus $6.0 million in Q4 2012 and $2.6 million in Q1 2012.
- Core noninterest income rose 10.6% to $6.5 million, including higher presold mortgage fees amid refinancing activity and increased mortgage staffing. Noninterest expense fell 4.7%, primarily reflecting the freeze of both defined-benefit pension plans effective December 31, 2012.
- On March 22, 2013, the company acquired two North Carolina branches, adding approximately $57 million in deposits and $16 million in loans. It paid a deposit premium of approximately $586,000.
- First Bancorp completed the January 2013 sale of approximately $68 million of higher-risk non-covered loans for about $30 million. The loans had been written down by approximately $38 million in Q4 2012. The sale and prior write-downs contributed to lower reported nonperforming assets.
- Non-covered nonaccrual loans increased to $38.9 million from $33.0 million at year-end, and covered nonaccrual loans rose to $51.2 million from $33.5 million, reflecting several larger credits that deteriorated. Foreclosed real estate declined, supported by property sales.
- Transaction deposits grew while time deposits declined. The company reported $22 million of internal non-covered loan growth in Q1, excluding the branch acquisition; covered loans declined by $18.8 million.
Outlook, risks and contingencies
- Management projected some net interest margin compression for the remainder of 2013, assuming no interest-rate changes, citing continued pressure on loan yields and limited scope for further deposit-cost reductions.
- Management said liquidity was adequate for foreseeable operating needs. Available borrowing sources included FHLB, correspondent-bank and Federal Reserve lines; none was outstanding at March 31, 2013.
- Credit quality remains a significant risk: the company cited elevated classified and nonperforming assets in a weak market, and noted that allowance estimates depend on judgments and may require future adjustments. Real estate, especially construction and land development, is a key credit exposure.
- FDIC loss-share agreements cover certain acquired loans and foreclosed properties, generally reimbursing 80% of covered losses. Related indemnification-asset estimates and acquired-loan discount accretion are judgmental and can create earnings volatility. One commercial loss-share agreement expires in June 2014.
- Management identified interest rates, economic conditions, customer financial health, regulatory actions and acquisition integration among forward-looking risks. The company reported no material legal proceedings, no derivative activity, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and classified credits persists, and how subsequent credit reviews affect the allowance and charge-offs.
- Actual proceeds, realized losses and asset-quality effects from the January loan sale and ongoing foreclosed-property dispositions.
- The collectability and timing assumptions behind the $100.6 million FDIC indemnification asset, including exposure as loss-share agreements approach expiration.
- How loan discount accretion, loan yields, funding costs and the projected margin compression affect earnings in later quarters.
- Whether branch-acquisition deposits and internal loan growth continue, and how capital, liquidity and the $0.08 quarterly dividend are maintained.