First Bancorp — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. First Bancorp is a North Carolina bank holding company; its banking subsidiary operates First Bank. Unless noted, figures are in millions of dollars.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $34.5 | $33.5 | $99.5 | $100.3 |
| Provision for loan losses | $7.1 | $9.1 | $35.1 | $31.4 |
| Noninterest income | $2.8 | $3.5 | $9.9 | $22.8 |
| Noninterest expense | $23.7 | $24.0 | $71.5 | $71.9 |
| Net income | $4.4 | $2.6 | $2.5 | $12.7 |
| Net income (loss) available to common shareholders | $3.7 | $(0.7) | $0.3 | $7.3 |
| Diluted earnings (loss) per common share | $0.22 | $(0.04) | $0.01 | $0.43 |
Margins: Tax-equivalent net interest margin was 4.86% in Q3, up from 4.79% a year earlier and 4.68% in Q2 2012. For the first nine months, it was 4.71%, down from 4.77% in 2011. Management attributed Q3 improvement partly to purchase-accounting loan discount accretion and lower funding costs; nine-month pressure reflected lower loan yields and more funds held in low-yield short-term investments.
Balance sheet at September 30: Assets were $3.323 billion; total loans $2.441 billion, including $2.137 billion non-covered and $304 million FDIC-covered; deposits $2.834 billion; cash and cash equivalents $283 million; and shareholders’ equity $343 million. Year over year, assets grew 0.6%, loans 0.4%, and deposits 3.8%. Borrowings were $111 million, down from $136 million a year earlier; repurchase-agreement funding was zero, versus $60 million.
Cash flow and liquidity: For the first nine months, operating cash flow was $34.7 million, investing cash flow $7.9 million, and financing cash flow $24.4 million; cash increased $67.0 million to $283.2 million. Available unused credit lines were $324 million at quarter-end. Liquid assets were 17.0% of deposits and borrowings, versus 15.8% a year earlier. Management said liquidity was adequate for foreseeable operating needs.
Capital: Total risk-based capital was 16.26%, Tier 1 risk-based capital 14.99%, and Tier 1 leverage capital 10.06%. Tangible common equity to tangible assets was 6.46%, down from 6.75% a year earlier. The company reported that it and its bank subsidiary exceeded applicable regulatory minimums.
Material changes and asset quality
- Q3 common earnings improved from a loss to profit. The year-to-date comparison moved the other way: common earnings fell to $0.3 million from $7.3 million. The 2011 period included a $10.2 million bargain-purchase gain from the Bank of Asheville acquisition; Q3 2011 also included $2.5 million of accelerated preferred-stock discount accretion.
- Non-covered nonperforming assets increased to $146 million from $119 million a year earlier, with non-covered nonperforming assets at 4.93% of non-covered assets. Non-covered accruing troubled debt restructurings rose to $38.5 million from $11.3 million at September 30, 2011. Management said approximately $30 million of performing loans were reclassified as TDRs following a routine regulatory examination; the loans were reclassified for disclosure and this did not affect the financial statements. About $37.1 million of non-covered TDRs were current or less than 30 days past due.
- Covered nonperforming assets declined to $114 million from $158 million a year earlier, primarily as covered foreclosed real estate fell to $58 million from $105 million. Total nonperforming assets were $260 million, or 7.82% of total assets.
- The allowance for loan losses rose to $49.5 million from $37.7 million a year earlier, or 2.03% of loans versus 1.55%. Nine-month provision increased to $35.1 million, while net charge-offs declined to $27.0 million from $43.2 million.
- Management cited an internal review and more conservative loss assumptions as key drivers of the higher 2012 non-covered provision, including about $11 million of additional provisions across approximately 30 loan relationships. It identified construction/land development, commercial real estate, and residential real estate among the affected categories.
Outlook, risks, and unusual items
- Management expected some net interest margin compression over the next 12 months, assuming no rate changes, and anticipated continued pressure on loan yields. The filing notes sensitivity to interest rates, competition, economic conditions, and uncertain timing and amount of purchase-accounting discount accretion.
- Management did not expect material near-term improvement or deterioration in non-covered nonperforming assets; it expected covered nonperforming assets to continue declining as assets are resolved and properties sold, absent further FDIC-assisted transactions.
- Management attributed elevated credit losses and nonperforming assets to high unemployment and declining property values in its markets. It cautioned that estimates for loan-loss allowances, acquired-loan values, and the FDIC indemnification asset involve significant judgment and may require future adjustments.
- The FDIC indemnification asset was $107.6 million, down from $121.7 million at year-end 2011. Covered assets generally receive 80% FDIC loss protection under the relevant loss-share agreements; associated indemnification-asset adjustments affect reported noninterest income.
- In October 2012, the company froze benefits under both pension plans effective December 31, 2012, expecting lower pension expense from 2013, partially offset by increased 401(k) contributions.
- After quarter-end, First Bank agreed to assume about $64 million in deposits and acquire selected performing loans of about $22 million from Four Oaks Bank branches; closing was expected in Q1 2013, subject to regulatory approval. In August, it completed a Wilmington branch deposit acquisition of about $9 million.
- The company declared a common dividend of $0.08 per share for Q3. SBLF preferred dividends were $2.3 million for the first nine months; management expected annualized preferred dividend rates of 3.0% for Q4 2012 and 1.2% for Q1 2013, subject to Treasury confirmation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no legal proceedings expected to materially affect financial position and no derivative activity.
Important facts for investors to verify
- Whether non-covered TDR growth and the examiner-related reclassifications signal further deterioration, and how much of the $38.5 million balance remains performing.
- Whether the $49.5 million allowance adequately covers credit losses, particularly in real estate construction, land development, and commercial real estate exposures.
- The sustainability of earnings excluding purchase-accounting accretion and the effect of its potential volatility on net interest income.
- Collection timing and recoverability of the $107.6 million FDIC indemnification asset, including future claims and loss-share terms.
- Progress and regulatory approval of the Four Oaks transaction, and the financial effect of pension changes and the expected preferred dividend rate reductions.