First Bancorp — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed March 15, 2012. First Bancorp is a North Carolina bank holding company operating First Bank, with 97 branches across North Carolina, South Carolina and Virginia. The 10-K reports audited consolidated financial statements.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $132.2 million | $127.4 million |
| Provision for loan losses | $41.3 million | $54.6 million |
| Noninterest income | $26.2 million | $29.1 million |
| Noninterest expense | $96.1 million | $87.0 million |
| Net income | $13.6 million | $10.0 million |
| Net income available to common shareholders | $7.5 million | $5.9 million |
| Diluted earnings per common share | $0.44 | $0.35 |
| Net interest margin, taxable-equivalent | 4.72% | 4.39% |
| Return on average assets | 0.23% | 0.18% |
| Net cash provided by operating activities | $37.0 million | $64.1 million |
At year-end, assets were $3.29 billion, loans $2.43 billion, deposits $2.76 billion, borrowings $133.9 million and shareholders’ equity $345.2 million. Cash and cash equivalents totaled $216.2 million. Liquid assets (cash and securities) equaled 15.7% of deposits and borrowings, up from 15.4% in 2010. The company reported total risk-based capital of 16.72%, a 10.21% leverage ratio and a 6.58% tangible common equity-to-tangible assets ratio. The Bank exceeded regulatory “well-capitalized” thresholds.
Net cash from investing activities was $171.3 million and financing activities used $204.1 million; cash increased $4.2 million during the year. Common dividends were $0.32 per share for the year, or $0.08 quarterly. Management said it intended to maintain the quarterly dividend, subject to financial and regulatory constraints.
Material changes and notable items
- Common-shareholder income rose 27.3%; consolidated net income rose 36.7%. Results included a $10.2 million bargain-purchase gain from the January 2011 acquisition of The Bank of Asheville, with a reported after-tax impact of $6.2 million, or $0.37 per diluted share.
- The company redeemed $65 million of TARP Series A preferred stock in September, funded largely by issuing $63.5 million of SBLF Series B preferred stock. Accelerated accretion of the remaining TARP preferred-stock discount reduced income available to common shareholders by $2.9 million in 2011. The Treasury warrant was repurchased for $924,000.
- Net interest income and margin improved, helped by lower funding costs and acquired-loan discount accretion. Loan discount accretion was $11.6 million, versus $7.6 million in 2010; management cautioned that future accretion is uncertain and depends on credit performance and repayment timing.
- Total loans declined 1.0% despite the Asheville acquisition; deposits rose 3.9%, reflecting the acquisition and growth in lower-cost transaction accounts. Borrowings declined by approximately $63 million. The non-covered loan portfolio showed modest growth in the second half.
- Credit provisions fell from 2010 but remained high. Net charge-offs increased to $49.3 million from $42.5 million. Total nonperforming assets declined to $263.3 million from $284.8 million, but non-covered nonperforming assets rose to $122.3 million from $117.1 million; non-covered NPA were 4.30% of non-covered assets.
- Noninterest expenses increased 10.5%, chiefly from staffing, healthcare costs, acquisition-related additions and investment in compliance and collections. The company disclosed a $1 million employee fraud loss involving circumvention of internal controls.
- Fourth-quarter net income available to common shareholders was $0.2 million, or $0.01 per diluted share, versus a $3.3 million loss, or $(0.19), in fourth-quarter 2010. Fourth-quarter 2010 included a $30.5 million loan-loss provision.
Outlook, risks and contingencies
Management expected 2012 to remain challenging, with weak regional loan demand and elevated loan losses amid unemployment, weak housing conditions and bankruptcies. It projected the 2012 net interest margin to remain relatively consistent if interest rates remained unchanged and expected an effective tax rate of approximately 35%. Management also anticipated increased regulatory and compliance costs and continued earnings volatility from acquired assets.
The FDIC loss-share agreements generally reimburse 80% of covered losses; Cooperative Bank losses above a specified threshold receive 95% coverage. The company’s FDIC indemnification asset was $121.7 million at year-end, an estimate subject to claim eligibility, collection timing and asset-loss assumptions. Covered and non-covered assets should be assessed separately.
Material risks include continued weakness in local real estate and the economy, concentrated real-estate collateral exposure (approximately 90% of loans), allowance-estimation uncertainty, interest-rate sensitivity, regulatory changes, acquisition integration and loss-share compliance. A pending agreement to acquire 11 Waccamaw Bank branches—approximately $180 million of deposits and $98 million of loans—was subject to regulatory approval and other conditions; about $31 million of loans could be returned to Waccamaw at par under specified terms. Management reported no material pending legal proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- Underlying earnings excluding the Asheville bargain-purchase gain and the effect of preferred-stock discount accretion.
- Whether non-covered credit quality, real-estate collateral values, charge-offs and other real estate owned improve or deteriorate.
- Collection and estimation of the FDIC indemnification asset, including compliance with loss-share terms and remaining covered-loss exposure.
- Capital, liquidity and dividend capacity after the TARP-to-SBLF preferred-stock replacement and completion of the pending Waccamaw transaction.
- Whether modest non-covered loan growth can continue without weakening underwriting or increasing credit costs.
- The effect of lower loan discount accretion, regulatory costs and operating expenses on recurring profitability and cash generation.