First Bancorp — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012 unless noted. Unaudited consolidated results; amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Interest income | $36.9 | $38.8 |
| Net interest income | $32.1 | $32.3 |
| Net interest margin, tax-equivalent | 4.59% | 4.62% |
| Provision for loan losses | $21.6 | $11.3 |
| Noninterest income | $5.3 | $14.2 |
| Noninterest expense | $24.4 | $25.0 |
| Net income (loss) | $(5.2) | $6.4 |
| Net income (loss) available to common shareholders | $(5.9) | $5.3 |
| Diluted earnings (loss) per share | $(0.35) | $0.32 |
| Operating cash flow | $(1.0) | $5.5 |
The company declared a common dividend of $0.08 per share, unchanged from Q1 2011. The filing does not report a consolidated operating margin measure.
Financial position, liquidity and capital
- Total assets were $3.337 billion, versus $3.402 billion a year earlier. Total loans were $2.437 billion, down 2.0% year over year; deposits were $2.831 billion, down 0.5%.
- Cash and cash equivalents were $293.3 million, up from $257.0 million a year earlier. Net loans were $2.384 billion. Total shareholders’ equity was $338.4 million.
- Borrowings were $133.9 million; repurchase-agreement balances were zero, compared with $73.0 million a year earlier. The filing reports no outstanding balance on its $50 million correspondent-bank line or approximately $92 million Federal Reserve discount-window line. Unused available credit lines totaled $243 million.
- Management reported a 16.34% total risk-based capital ratio, 15.07% Tier 1 risk-based ratio, 9.97% Tier 1 leverage ratio, and 6.29% tangible common equity to tangible assets. It said the company and bank subsidiary exceeded regulatory minimums and remained well-capitalized.
Material changes and asset quality
- The company swung to a common-shareholder loss, primarily because the loan-loss provision rose to $21.6 million from $11.3 million. Non-covered loan provision increased to $18.6 million from $7.6 million. Management attributed the increase to model refinements, revised internal responsibilities, and a review of selected problem credits using more conservative assumptions; approximately $11 million of additional provision related to about 30 loan relationships.
- Noninterest income fell $8.8 million, principally because Q1 2011 included a $10.2 million bargain-purchase gain on the Bank of Asheville acquisition. Q1 2012 also included $4.1 million of FDIC indemnification-asset income and $0.5 million of securities gains.
- Noninterest expense decreased 2.7%. Lower collection and FDIC insurance costs and no merger expense were partly offset by higher personnel costs, including health-care and pension expense. Q1 2012 included $0.4 million of severance expense.
- Total nonperforming assets were $252.2 million, down from $285.0 million a year earlier; nonperforming assets were 7.56% of total assets. Non-covered nonperforming assets were $117.1 million, broadly stable year over year; covered nonperforming assets declined to $135.1 million from $169.0 million.
- The allowance for loan losses was $52.8 million, or 2.17% of loans, compared with $42.8 million and 1.72% a year earlier. Net charge-offs were $10.1 million, versus $18.0 million in Q1 2011. No loans were over 90 days past due and still accruing interest.
- Non-covered loans grew 2.4% year over year and 1.2% during Q1; covered loans declined as acquired credits were repaid, charged off, or foreclosed. Q1 deposits increased 2.8% from year-end, though they remained slightly below the prior-year level.
Outlook, risks and notable items
- Management projected net interest margin for the remainder of 2012 to remain relatively consistent with recent levels, assuming no interest-rate changes. It expected non-covered nonperforming assets to show no material improvement or deterioration in the near term.
- Management cited unemployment and declining local property values as pressures on credit quality, particularly collateral-dependent real estate lending. It warned that loan-loss estimates depend on judgment and economic assumptions and may require future adjustments; regulatory examinations may also require changes.
- FDIC loss-share agreements cover specified acquired assets and generally reimburse 80% of covered losses. Changes in acquired-loan performance affect both provisions or asset values and the FDIC indemnification asset. The company noted that acquired-loan discount accretion is uncertain and can be volatile.
- The company expected a 4.8% dividend rate on its $63.5 million Treasury Small Business Lending Fund preferred stock for the next dividend period, subject to Treasury confirmation. The rate depends on qualified small-business lending and could rise to 9% after four and a half years.
- A proposed purchase of 11 Waccamaw Bank branches, involving about $180 million of deposits and $98 million of loans, remained subject to regulatory approval. Separately, an April 30, 2012 agreement to assume deposits and acquire certain loans from a Gateway Bank & Trust branch was expected to close in Q3, subject to approval.
- Management said liquidity was adequate for foreseeable operating needs. It reported no material legal proceedings, no derivatives activity, and effective disclosure controls. It disclosed a realignment of responsibilities for determining the loan-loss allowance.
Most important facts for investors to verify
- Whether the higher non-covered loan-loss reserves adequately reflect credit risk, and how subsequent charge-offs, delinquencies, and nonperforming assets develop.
- Whether local property values and the company’s real-estate concentration—about 90% of loans—create further losses, particularly in construction and land-development credits.
- Whether FDIC reimbursements and the indemnification asset are ultimately realized as estimated, and how acquired-loan discount accretion affects future earnings.
- Whether operating results improve without the prior-year bargain-purchase gain and whether the stated margin outlook holds.
- Regulatory approval, purchase economics, and integration risks for the pending Waccamaw and Gateway transactions; confirm the Waccamaw agreement’s put-back provision for approximately $31 million of loans.
- Capital and liquidity trends, including available borrowing capacity, deposit mix, and the preferred-stock dividend rate tied to small-business lending.