First Bancorp — 2012 Form 10-K Summary
Business and reporting period. First Bancorp is a North Carolina bank holding company operating First Bank, a community bank serving North Carolina, southwestern Virginia and northeastern South Carolina. It reported for the fiscal year ended December 31, 2012; comparisons are primarily with 2011. The bank had 97 branches at year-end. The filing was signed March 15, 2013.
Financial performance and condition
- Earnings: Net loss was $23.4 million, or $1.54 per diluted common share, versus net income of $13.6 million, or $0.44 per diluted share, in 2011. The loss available to common shareholders was $26.2 million after $2.8 million in preferred dividends.
- Fourth quarter: Net loss was $25.9 million, or $1.53 per share; the quarter included $44.6 million in loan-loss provision and negative noninterest income of $8.5 million, reflecting the loan disposition and foreclosed-property actions.
- Interest income and margin: Net interest income was $135.2 million, up 2.3% from $132.2 million. Tax-equivalent net interest margin rose to 4.78% from 4.72%, aided by lower funding costs and greater acquired-loan discount accretion. Interest expense fell to $17.3 million from $23.6 million.
- Credit costs and fee income: Total loan-loss provision increased to $79.7 million from $41.3 million: $70.0 million for non-covered loans and $9.7 million for FDIC-covered loans. Net charge-offs were $74.7 million versus $49.3 million. Noninterest income fell to $1.4 million from $26.2 million, chiefly due to foreclosed-property losses/write-downs and the prior-year $10.2 million Bank of Asheville acquisition gain. Core noninterest income increased 10% to $25.5 million.
- Expenses and returns: Noninterest expense rose 1.2% to $97.3 million. Return on average assets was negative 0.79% and return on average common equity was negative 9.29%, versus positive 0.23% and 2.59%, respectively, in 2011.
- Balance sheet: Year-end assets were $3.245 billion, down 1.4%; loans were $2.376 billion, down 2.2%; deposits were $2.821 billion, up 2.4%. Shareholders’ equity was $356.1 million. The allowance for loan losses was $46.4 million, or 1.95% of total loans.
- Cash flow and liquidity: Operating cash flow was $41.7 million; investing cash flow was $5.7 million; financing cash flow was negative $22.1 million. Cash and cash equivalents increased $25.3 million to $241.5 million. Liquid assets were 16.2% of deposits and borrowings, compared with 15.7% a year earlier. Available facilities included an FHLB line, a federal-funds line and Federal Reserve discount-window capacity; amounts available are subject to collateral and other conditions.
- Debt and capital: Borrowings declined to $46.4 million from $133.9 million after repayment of FHLB advances; remaining debt consisted of trust-preferred securities. Total risk-based capital was 16.67%, Tier 1 risk-based capital 15.41%, and Tier 1 leverage 10.24%. Tangible common equity to tangible assets was 6.81%, up from 6.58%.
Material changes and unusual items
- In December, the company raised approximately $33.8 million through common and Series C preferred stock issued at $10 per share. The transaction issued 2.66 million common shares and 0.73 million preferred shares.
- The company marked down approximately $68 million of higher-risk, non-covered loans by about $38 million to an estimated $30 million liquidation value, recording approximately $32.9 million of incremental provision. The substantially same loan pool was sold on January 23, 2013 for approximately $30.4 million, matching its carrying value.
- It recorded $10.6 million of write-downs on non-covered foreclosed properties, approximately 29% of their carrying value, to facilitate accelerated sales. Total non-covered foreclosed-property losses and write-downs were $15.3 million for 2012.
- A first-quarter internal review applied more conservative loss assumptions and contributed to an $18.6 million non-covered provision. Management said many of these loans were later included in the loan sale.
- Nonperforming assets declined to $202.4 million from $263.3 million. Non-covered nonperforming assets were $106.1 million, including $21.9 million of loans held for sale; covered nonperforming assets fell to $96.2 million. Management attributed improvement in part to write-downs and the loan sale.
- FDIC loss-share agreements generally reimburse 80% of covered losses, subject to agreement terms and expiration dates. The FDIC indemnification asset declined to $102.6 million from $121.7 million.
- The company froze its pension and supplemental executive retirement plans at year-end. It also paid off $65 million of FHLB advances early, incurring a $0.5 million prepayment penalty.
Outlook, risks and contingencies
- Management expected credit losses to remain elevated versus pre-2009 levels, while expressing optimism that the loan sale could reduce provisions and collection costs in 2013. It expected gradual recovery in its markets.
- Management anticipated some net interest margin compression in 2013, citing downward pressure on loan yields and limited scope to reduce already-low deposit rates. It also expected additional regulatory compliance costs and continued earnings volatility from acquired-loan discount accretion and FDIC-assisted acquisitions.
- The company expected a 1% dividend rate on its $63.5 million SBLF preferred stock for much of 2013; the filing gives more specific expected quarterly rates of 1.2% and 1.0%, subject to Treasury confirmation. It stated an intention to continue common dividends of $0.08 per quarter, while noting regulatory and financial constraints could affect dividends.
- Key risks include local economic weakness and real-estate values (about 90% of loans were secured by real estate), construction and land-development exposure, interest-rate and margin risk, allowance-estimation uncertainty, regulatory changes and capital requirements, and FDIC loss-share compliance. Moore County represented approximately 15% of deposits.
- Outstanding commitments included $541 million of loan commitments and $12.8 million of standby letters of credit. Management reported no pending legal proceedings believed likely to materially affect the company. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the January 2013 loan sale closed on the reported terms and whether subsequent credit costs and nonperforming assets improved.
- How much of the 2012 credit deterioration was addressed by the sale and property write-downs, and whether remaining non-covered real-estate and construction exposures require further provisions.
- The sustainability of reported net interest income and margin, including the contribution and timing of acquired-loan discount accretion.
- Capital and liquidity after the equity raise, including actual regulatory ratios, available borrowing capacity, and restrictions on dividends.
- The realization and collection timing of the $102.6 million FDIC indemnification asset, including compliance with loss-share terms and approaching agreement expirations.
- Whether management’s 2013 assumptions on credit costs, margin compression, regulatory expenses and preferred-stock dividend rates were borne out.