FBNC

First Bancorp Q1 2011 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2011. First Bancorp is a North Carolina-based financial holding company. The reporting period was significantly impacted by the acquisition of The Bank of Asheville on January 21, 2011, an FDIC-assisted transaction involving the assumption of substantially all assets and liabilities of the failed bank.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisition Gain: The company recorded a $10.2 million bargain purchase gain from the acquisition of The Bank of Asheville. This non-recurring item significantly boosted noninterest income and net income.
• Provision for Loan Losses: Increased to $11.3 million from $7.6 million. The increase was driven by $3.8 million in provisions for "covered" loans (acquired from failed banks) due to updated appraisals showing lower collateral values, and $7.5 million for non-covered loans.
• Noninterest Income: Rose to $14.2 million from $5.7 million, primarily due to the acquisition gain and $5.0 million in FDIC indemnification asset income. This was partially offset by $6.3 million in write-downs on foreclosed properties.
• Net Interest Margin: Improved by 46 basis points to 4.62%, driven by lower funding costs as the company reduced rates on maturing time deposits and decreased reliance on higher-cost deposits.
• Asset Quality: Total nonperforming assets remained relatively stable at $285 million. However, the composition shifted with the addition of nonperforming assets from The Bank of Asheville acquisition.

Guidance, Outlook, and Risks

• Outlook: Management expects nonperforming assets to remain stable with no material improvement or deterioration in the near future. Loan demand remains weak, and the company anticipates a decline in loans for 2011.
• Interest Rate Risk: The company projects the net interest margin to remain relatively consistent for the remainder of 2011, assuming stable interest rates. The company is currently asset-sensitive in the short term but faces downward pressure on net interest income in a rising rate environment over a 12-month horizon due to a liability-sensitive gap.
• Acquisition Risks: The $10.2 million gain is preliminary and subject to adjustment for up to one year. If loan losses on the acquired portfolio are greater than projected, the gain could be retroactively reduced or eliminated. Integration risks include potential loss of key employees and customers.
• FDIC Loss Share: A significant portion of the loan portfolio ($440 million) is covered by FDIC loss share agreements, which reimburse 80% of losses. This provides significant protection but introduces volatility in noninterest income via the indemnification asset adjustments.
• TARP Participation: The company holds $65 million in preferred stock issued to the U.S. Treasury under the Capital Purchase Program. This restricts share repurchases and dividend increases without Treasury approval.

Investor Verification Checklist

• Acquisition Gain Finalization: Monitor future filings for adjustments to the preliminary $10.2 million gain from The Bank of Asheville acquisition.
• Covered Loan Performance: Track the performance of the $440 million in FDIC-covered loans and the corresponding changes in the FDIC indemnification asset.
• Non-Covered Asset Quality: Verify trends in non-covered nonperforming assets ($116 million) and net charge-offs, which remain elevated due to the economic environment.
• Loan Discount Accretion: Assess the sustainability of net interest income, which currently benefits from the accretion of purchase accounting discounts on acquired loans.
• Foreclosed Property Valuations: Review ongoing write-downs on other real estate owned (OREO), particularly in the coastal North Carolina market.