Business Context and Reporting Period
Company: First Bancorp (FBNC)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: First Bancorp is a bank holding company headquartered in Troy, North Carolina, operating primarily through its subsidiary, First Bank. The company serves a 36-county region in North Carolina, with additional operations in South Carolina and Virginia. As of December 31, 2009, the bank operated 91 branches.
Key Event: On June 19, 2009, First Bank acquired substantially all assets and liabilities of Cooperative Bank in an FDIC-assisted transaction. This acquisition added $959 million in assets, including $829 million in loans and $706 million in deposits. The transaction included FDIC loss share agreements covering 80% of losses up to $303 million and 95% of losses thereafter on covered assets.
Key Financial Metrics
| Metric ($ in thousands) | 2009 | 2008 | Change |
|---|---|---|---|
| Net Interest Income | $107,096 | $86,559 | +23.7% |
| Provision for Loan Losses | $20,186 | $9,880 | +104.3% |
| Noninterest Income | $89,518 | $20,657 | +333.4% |
| Noninterest Expenses | $78,551 | $62,211 | +26.3% |
| Net Income | $60,259 | $22,005 | +173.8% |
| Net Income Available to Common Shareholders | $56,287 | $22,005 | +155.8% |
| Earnings Per Share (Diluted) | $3.37 | $1.37 | +146.0% |
| Total Assets | $3,545,356 | $2,750,567 | +28.9% |
| Total Loans | $2,652,865 | $2,211,315 | +20.0% |
| Total Deposits | $2,933,108 | $2,074,791 | +41.4% |
| Shareholders' Equity | $342,383 | $219,868 | +55.7% |
Key Ratios:
- Return on Average Assets: 1.82% (2009) vs. 0.89% (2008)
- Return on Average Common Equity: 22.55% (2009) vs. 10.44% (2008)
- Net Interest Margin (Taxable-Equivalent): 3.81% (2009) vs. 3.74% (2008)
- Efficiency Ratio: 39.79% (2009) vs. 57.67% (2008)
Material Changes vs. Prior Period
- Acquisition Impact: The 2009 results were significantly driven by the Cooperative Bank acquisition. Noninterest income increased by $68.9 million, primarily due to a $67.9 million gain on acquisition. Excluding this gain, core noninterest income grew only 6.6%.
- Asset Quality Deterioration: Despite the acquisition gain, the company faced worsening asset quality in its "non-covered" portfolio due to the recession. Non-covered nonperforming assets rose to $92 million (3.10% of non-covered assets) from $35 million (1.29%) in 2008. Consequently, the provision for loan losses more than doubled to $20.2 million.
- Capital Strengthening: In January 2009, the company participated in the U.S. Treasury's Capital Purchase Program (TARP), issuing $65 million in preferred stock. This significantly boosted capital ratios and liquidity.
- Deposit Growth: Total deposits grew 41.4%, with $712 million attributed to the Cooperative acquisition. Internally generated deposits grew 7.0%.
Guidance, Outlook, and Risks
Outlook for 2010: Management expects the banking industry to face significant challenges in 2010. Key expectations include:
- Economic Conditions: Continued weak economic data and high unemployment in the Carolinas and Virginia.
- Asset Quality: Provisions for loan losses are expected to remain elevated as the company has not yet seen a leveling off of unfavorable asset quality indicators.
- Loan Demand: Expected to remain low, potentially resulting in a continued decline in the loan portfolio.
- Net Interest Margin: Expected to remain relatively consistent with recent levels, though asset yields may decline due to lower loan balances and higher nonaccrual levels.
- Noninterest Income: Expected to decrease in the second half of 2010 due to new legislation limiting overdraft fees on ATM and debit card transactions.
Risks and Contingencies:
- FDIC Loss Share Adjustments: The $67.9 million acquisition gain is subject to adjustment for up to one year. While recent appraisals increased the gain, future adjustments could retroactively decrease it.
- Goodwill Impairment: The company's stock price traded below book value for much of 2009. If this persists, the company may be required to record a significant goodwill impairment charge.
- Liquidity Constraints: In January 2010, an FHLB collateral audit reduced the company's borrowing availability from $687 million to approximately $335 million due to document retention issues (imaging vs. original documents).
- Regulatory Restrictions: Participation in TARP restricts the company's ability to increase dividends above $0.19 per share or repurchase stock until January 2012 or until the preferred stock is redeemed.
Important Facts for Investor Verification
- Acquisition Gain Sustainability: Verify the finalization of the Cooperative Bank purchase accounting adjustments to confirm the $67.9 million gain is not subject to further retroactive reduction.
- Non-Covered Asset Quality: Monitor the trend of non-covered nonperforming assets (currently 3.10%) and the adequacy of the allowance for loan losses (1.75% of non-covered loans) given the recessionary environment.
- FHLB Borrowing Capacity: Confirm the timeline for restoring the FHLB borrowing line from $335 million back to previous levels following the document retention audit findings.
- TARP Redemption Strategy: Assess the company's plan and timeline for redeeming the $65 million TARP preferred stock, which carries a 5% dividend rate (increasing to 9% after five years) and restricts capital actions.
- Overdraft Fee Legislation: Evaluate the potential impact of new federal regulations on overdraft fees, which are expected to reduce noninterest income in 2010.