Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FBNC > SEC Filings for FBNC > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FIRST BANCORP /NC/

Form 10-Q for FIRST BANCORP /NC/


9-Nov-2012

Quarterly Report


Item 2 - Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition

Critical Accounting Policies

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices followed by the banking industry. Certain of these principles involve a significant amount of judgment and may involve the use of estimates based on our best assumptions at the time of the estimation. The allowance for loan losses, intangible assets, and the fair value and discount accretion of loans acquired in FDIC-assisted transactions are three policies we have identified as being more sensitive in terms of judgments and estimates, taking into account their overall potential impact to our consolidated financial statements.

Allowance for Loan Losses

Due to the estimation process and the potential materiality of the amounts involved, we have identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to our consolidated financial statements. The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb losses inherent in the portfolio.

Our determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves a review, and an estimation of losses, on loans or loan relationships that are significant in size and that are impaired ("impaired loans"). A loan is considered to be impaired when, based on current information and events, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that we expect to receive from the borrower discounted at the loan's effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

The second component of the allowance model is an estimate of losses for smaller balance impaired loans and all loans not considered to be impaired loans ("general reserve loans"). General reserve loans having normal credit risk are segregated by loan type, and estimated loss percentages are assigned to each loan type, based on the historical losses, current economic conditions, and operational conditions specific to each loan type. For loans that we have risk graded as having more than "standard" risk, loss percentages are based on a multiple of the estimated loss rate for loans of a similar loan type with normal risk. The multiples assigned vary by type of loan, depending on risk, and we have consulted with an external credit review firm in assigning those multiples.

The reserve estimated for impaired loans is then added to the reserve estimated for general reserve loans. This becomes our "allocated allowance." In addition to the allocated allowance derived from the model, we also evaluate other data such as the ratio of the allowance for loan losses to total loans, net loan growth information, nonperforming asset levels and trends in such data. Based on this additional analysis, we may determine that an additional amount of allowance for loan losses is necessary to reserve for probable losses. This additional amount, if any, is our "unallocated allowance." The sum of the allocated allowance and the unallocated allowance is compared to the actual allowance for loan losses recorded on our books and any adjustment necessary for the recorded allowance to equal the computed allowance is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded.

Loans covered under loss share agreements are recorded at fair value at acquisition date. Therefore, amounts deemed uncollectible at acquisition date become a part of the fair value calculation and are excluded from the allowance for loan losses. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected are accreted into income over the life of the loan. Proportional adjustments are also recorded to the FDIC indemnification asset.

Page 42

Index

Although we use the best information available to make evaluations, future material adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on the examiners' judgment about information available to them at the time of their examinations.

For further discussion, see "Nonperforming Assets" and "Summary of Loan Loss Experience" below.

Intangible Assets

Due to the estimation process and the potential materiality of the amounts involved, we have also identified the accounting for intangible assets as an accounting policy critical to our consolidated financial statements.

When we complete an acquisition transaction, the excess of the purchase price over the amount by which the fair market value of assets acquired exceeds the fair market value of liabilities assumed represents an intangible asset. We must then determine the identifiable portions of the intangible asset, with any remaining amount classified as goodwill. Identifiable intangible assets associated with these acquisitions are generally amortized over the estimated life of the related asset, whereas goodwill is tested annually for impairment, but not systematically amortized. Assuming no goodwill impairment, it is beneficial to our future earnings to have a lower amount assigned to identifiable intangible assets and higher amount of goodwill as opposed to having a higher amount considered to be identifiable intangible assets and a lower amount classified as goodwill.

The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangible, whereas when we acquire an insurance agency, the primary identifiable intangible asset is the value of the acquired customer list. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. We typically engage a third party consultant to assist in each analysis. For the whole bank and bank branch transactions recorded to date, the core deposit intangibles have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. For insurance agency acquisitions, the identifiable intangible assets related to the customer lists were determined to have a life of ten to fifteen years, with amortization occurring on a straight-line basis.

Subsequent to the initial recording of the identifiable intangible assets and goodwill, we amortize the identifiable intangible assets over their estimated average lives, as discussed above. In addition, on at least an annual basis, goodwill is evaluated for impairment by comparing the fair value of our reporting units to their related carrying value, including goodwill (our community banking operation is our only material reporting unit). If the carrying value of a reporting unit were ever to exceed its fair value, we would determine whether the implied fair value of the goodwill, using a discounted cash flow analysis, exceeded the carrying value of the goodwill. If the carrying value of the goodwill exceeded the implied fair value of the goodwill, an impairment loss would be recorded in an amount equal to that excess. Performing such a discounted cash flow analysis would involve the significant use of estimates and assumptions.

In our 2011 goodwill impairment evaluation, we determined the fair value of our community banking operation was approximately $18.50 per common share, or 8% higher, than the $17.08 stated book value of our common stock at the date of valuation. To assist us in computing the fair value of our community banking operation, we engaged a consulting firm who used various valuation techniques as part of their analysis, which resulted in the conclusion of the $18.50 value. The 2012 evaluation will be performed in the fourth quarter of 2012 and will follow a similar process.

Page 43

Index

We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset's carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.

Fair Value and Discount Accretion of Loans Acquired in FDIC-Assisted Transactions

We consider the determination of the initial fair value of loans acquired in FDIC-assisted transactions, the initial fair value of the related FDIC indemnification asset, and the subsequent discount accretion of the purchased loans to involve a high degree of judgment and complexity. We determine fair value accounting estimates of newly assumed assets and liabilities in accordance with relevant accounting guidance. However, the amount that we realize on these assets could differ materially from the carrying value reflected in our financial statements, based upon the timing of collections on the acquired loans in future periods. To the extent the actual values realized for the acquired loans are different from the estimates, the FDIC indemnification asset will generally be impacted in an offsetting manner due to the loss-sharing support from the FDIC.

Because of the inherent credit losses associated with the acquired loans in a failed bank acquisition, the amount that we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the "discount" on the acquired loans. We have applied the cost recovery method of accounting to all purchased impaired loans due to the uncertainty as to the timing of expected cash flows. This will result in the recognition of interest income on these impaired loans only when the cash payments received from the borrower exceed the recorded net book value of the related loans.

For nonimpaired purchased loans, we accrete the discount over the lives of the loans in a manner consistent with the guidance for accounting for loan origination fees and costs.

Current Accounting Matters

See Note 2 to the Consolidated Financial Statements above for information about accounting standards that we have recently adopted.

RESULTS OF OPERATIONS

Overview

Net income available to common shareholders for the third quarter of 2012 amounted to $3.7 million, or $0.22 per diluted common share, compared to a net loss of $0.7 million, or ($0.04) per diluted common share, recorded in the third quarter of 2011. For the nine months ended September 30, 2012, we reported net income available to common shareholders of $0.3 million, or $0.01 per diluted common share, compared to net income of $7.3 million, or $0.43 per diluted common share, for the nine months ended September 30, 2011.

The results for the third quarter of 2011 were negatively impacted by $2.3 million in accelerated accretion of the discount remaining on preferred stock that was redeemed that quarter. Also impacting comparability from 2011 to 2012 was a $10.2 million bargain purchase gain related to the January 2011 acquisition of The Bank of Asheville in Asheville, North Carolina.

Note Regarding Components of Earnings

Our results of operations are significantly affected by the on-going accounting for two FDIC-assisted failed bank acquisitions. In the discussion below, the term "covered" is used to describe assets included as part of FDIC loss share agreements, which generally result in the FDIC reimbursing the Company for 80% of losses incurred on those assets. The term "non-covered" refers to the Company's legacy assets, which are not included in any type of loss share arrangement.

Page 44

Index

For covered loans that deteriorate in terms of repayment expectations, we record immediate allowances through the provision for loan losses. For covered loans that experience favorable changes in credit quality compared to what was expected at the acquisition date, including loans that payoff, we record positive adjustments to interest income over the life of the respective loan - also referred to as loan discount accretion. For foreclosed properties that are sold at gains or losses or that are written down to lower values, we record the gains/losses within noninterest income.

The adjustments discussed above are recorded within the income statement line items noted without consideration of the FDIC loss share agreements. Because favorable changes in covered assets result in lower expected FDIC claims, and unfavorable changes in covered assets result in higher expected FDIC claims, the FDIC indemnification asset is adjusted to reflect those expectations. The net increase or decrease in the indemnification asset is reflected within noninterest income.

The adjustments noted above can result in volatility within individual income statement line items. Because of the FDIC loss share agreements and the associated indemnification asset, pretax income resulting from amounts recorded as provisions for loan losses on covered loans, discount accretion, and losses from covered foreclosed properties is generally only impacted by 20% of these amounts due to the corresponding adjustments made to the indemnification asset.

Net Interest Income and Net Interest Margin

Net interest income for the third quarter of 2012 amounted to $34.5 million, a 2.9% increase from the $33.5 million recorded in the third quarter of 2011. Net interest income for the nine months ended September 30, 2012 amounted to $99.5 million, a 0.8% decrease from the $100.3 million recorded in the comparable period of 2011.

Our net interest margin (tax-equivalent net interest income divided by average earning assets) in the third quarter of 2012 was 4.86%, a seven basis point increase compared to the 4.79% margin realized in the third quarter of 2011 and an 18 basis point increase from the 4.68% margin realized in the second quarter of 2012. The higher margins were primarily a result of higher amounts of discount accretion on loans purchased in failed bank acquisitions recognized during the respective periods, as well as lower overall funding costs. Our cost of funds has steadily declined from 0.78% in the third quarter of 2011 to 0.57% in the third quarter of 2012.

For the nine month period ended September 30, 2012, our net interest margin was 4.71% compared to 4.77% for the same period in 2011. The lower margin was primarily due to lower loan yields, as well as the mix of our earning assets being more concentrated in lower yielding short-term investments in 2012 compared to a larger concentration of higher yielding loans and securities in 2011.

Provision for Loan Losses and Asset Quality

We recorded total provisions for loan losses of $7.1 million in the third quarter of 2012 compared to $9.1 million for the third quarter of 2011. For the nine months ended September 30, 2012, we recorded total provisions for loan losses of $35.1 million compared to $31.4 million for the comparable period of 2011.

The provision for loan losses on non-covered loans amounted to $6.0 million in the third quarter of 2012 compared to $6.4 million in the third quarter of 2011. The decline in provision was primarily due to stabilization in our assessment of the losses associated with our nonperforming non-covered loans. For the first nine months of 2012, provision for loan losses on non-covered loans amounted to $29.7 million compared to $21.6 million for the same period of 2011. The higher provision for loan losses was primarily a result of an internal review of non-covered loans that occurred in the first quarter of 2012 that applied more conservative assumptions to estimate the probable losses associated with some of our nonperforming loan relationships, which we believe may lead to a more timely resolution of the related credits.

Page 45

Index

Our provisions for loan losses for covered loans amounted to $1.1 million and $2.7 million for the three months ended September 30, 2012 and 2011, respectively, and $5.4 million and $9.8 million for the nine months ended September 30, 2012 and 2011, respectively. The lower provisions in 2012 were also due to stabilization in our assessment of the losses associated with our nonperforming covered loans. The majority of the provisions for loan losses on covered loans in 2011 and 2012 relate to loans assumed in the Company's June 2009 acquisition of Cooperative Bank. As previously discussed, the provision for loan losses related to covered loans is offset by an 80% increase to the FDIC indemnification asset, which increases noninterest income.

Total non-covered nonperforming assets amounted to $146 million at September 30, 2012 (4.93% of non-covered total assets), an increase of $27 million from the $119 million recorded at September 30, 2011, primarily caused by an increase in troubled debt restructurings (see further discussion in section entitled "Nonperforming Assets").

Total covered nonperforming assets have generally declined over the past 12 months, amounting to $114 million at September 30, 2012 compared to $158 million at September 30, 2011. Within this category, foreclosed real estate has declined from $105 million at September 30, 2011 to $58 million at September 30, 2012.

Noninterest Income

Total noninterest income for the three months ended September 30, 2012 was $2.8 million compared to $3.5 million for the comparable period of 2011. In the third quarter of 2012, higher loan discount accretion resulted in a write-down of the indemnification asset that more than offset increases to that asset relating to the provision for covered loan losses and foreclosed property losses on covered assets. This resulted in a net of $1.6 million of indemnification asset expense compared to $3.6 million in indemnification asset income recorded in the third quarter of 2011 (see discussion in section entitled "Components of Earnings").

For the nine months ended September 30, 2012 and 2011, we recorded noninterest income of $9.9 million and $22.8 million, respectively. The significant decrease in noninterest income for the nine month period comparison is primarily the result of the previously discussed $10.2 million bargain purchase gain recorded in the acquisition of The Bank of Asheville during the first quarter of 2011.

Noninterest Expenses

Noninterest expenses amounted to $23.7 million in the third quarter of 2012, a 1.3% decrease from the $24.0 million recorded in the third quarter of 2011. Noninterest expenses for the nine months ended September 30, 2012 amounted to $71.5 million, a 0.6% decrease from the $71.9 million recorded in the first nine months of 2011. During 2012, we have emphasized cost control measures to enhance our profitability. (See further discussion in section entitled "Components of Earnings".)

Balance Sheet and Capital

Total assets at September 30, 2012 amounted to $3.3 billion, a 0.6% increase from a year earlier. Total loans at September 30, 2012 amounted to $2.4 billion, a 0.4% increase from a year earlier, and total deposits amounted to $2.8 billion at September 30, 2012, a 3.8% increase from a year earlier.

For the fifth consecutive quarter, we experienced growth in our non-covered loan portfolio, with non-covered loans increasing by $22 million during the three months ended September 30, 2012. At September 30, 2012, non-covered loans amounted to $2.1 billion, an increase of $78 million, or 3.8%, from a year earlier. We are actively pursuing lending opportunities.

Page 46

Index

Our level of non-interest bearing checking accounts amounted to $398.5 million at September 30, 2012, a 19.3% increase from a year earlier, while interest-bearing checking accounts amounted to $482.6 million, an increase of 28.0% from a year earlier. Contributing to the increase in interest-bearing checking accounts was a shift into this category from customer repurchase agreements as a result of the repeal of the prohibition on banks paying interest on commercial deposit accounts. The overall growth in checking and other transaction accounts has allowed us to reduce our reliance on higher cost time deposits.

We remain well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at September 30, 2012 of 16.26% compared to the 10.00% minimum to be considered well-capitalized. Our tangible common equity to tangible assets ratio was 6.46% at September 30, 2012, a decrease of 29 basis points from a year earlier.

Components of Earnings

Net interest income is the largest component of earnings, representing the difference between interest and fees generated from earning assets and the interest costs of deposits and other funds needed to support those assets. Net interest income for the three month period ended September 30, 2012 amounted to $34.5 million, an increase of $1.0 million, or 2.9%, from the $33.5 million recorded in the third quarter of 2011. Net interest income on a tax-equivalent basis for the three month period ended September 30, 2012 amounted to $34.8 million, an increase of $1.0 million, or 2.9%, from the $33.9 million recorded in the third quarter of 2011. We believe that analysis of net interest income on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest income amounts in different periods without taking into account the different mix of taxable versus non-taxable investments that may have existed during those periods.

                                        Three Months Ended September 30,
($ in thousands)                           2012                  2011
Net interest income, as reported      $        34,473                33,489
Tax-equivalent adjustment                         376                   389
Net interest income, tax-equivalent   $        34,849                33,878

Net interest income for the nine month period ended September 30, 2012 amounted to $99.5 million, a decrease of $0.8 million, or 0.8%, from the $100.3 million recorded in the same period of 2011. Net interest income on a tax-equivalent basis for the nine month period ended September 30, 2012 amounted to $100.7 million, a decrease of $0.8 million, or 0.8%, from the $101.5 million recorded in the same period of 2011.

                                          Nine Months Ended September 30,
($ in thousands)                            2012                   2011
Net interest income, as reported      $         99,515                100,283
Tax-equivalent adjustment                        1,150                  1,162
Net interest income, tax-equivalent   $        100,665                101,445

There are two primary factors that cause changes in the amount of net interest income we record - 1) changes in our loans and deposits balances, and 2) our net interest margin (tax-equivalent net interest income divided by average interest-earning assets).

For the three months ended September 30, 2012, the higher net interest income compared to the third quarter of 2011 was primarily due to higher amounts of discount accretion on loans purchased in failed bank acquisitions recognized during the respective periods (see discussion below). For the nine months ended September 30, 2012, the lower net interest income compared to the same period of 2011 was primarily due to a slightly lower net interest margin, which is also discussed in more detail below.

Page 47

Index

The following table presents net interest income analysis on a tax-equivalent basis.

                                                                                  For the Three Months Ended September 30,
                                                                               2012                                      2011
                                                                                           Interest                                  Interest
                                                                 Average        Average     Earned         Average        Average     Earned
($ in thousands)                                                 Volume          Rate       or Paid        Volume          Rate       or Paid
Assets
Loans (1)                                                      $ 2,432,528        6.06 %   $  37,037     $ 2,441,486        6.04 %   $  37,200
Taxable securities                                                 158,749        2.51 %       1,001         163,566        3.45 %       1,421
Non-taxable securities (2)                                          56,154        6.11 %         863          57,577        6.13 %         889
Short-term investments, principally federal funds                  207,652        0.31 %         164         145,576        0.29 %         107
Total interest-earning assets                                    2,855,083        5.44 %      39,065       2,808,205        5.60 %      39,617

Cash and due from banks                                             62,950                                    74,797
Premises and equipment                                              73,861                                    69,413
Other assets                                                       322,993                                   341,343
Total assets                                                   $ 3,314,887                               $ 3,293,758

Liabilities
Interest bearing checking                                      $   464,260        0.15 %   $     172     $   364,140        0.20 %   $     183
Money market deposits                                              543,420        0.31 %         418         504,851        0.55 %         696
Savings deposits                                                   159,431        0.15 %          60         146,576        0.38 %         141
Time deposits >$100,000                                            725,607        1.11 %       2,022         757,213        1.30 %       2,479
Other time deposits                                                546,733        0.80 %       1,097         628,272        1.04 %       1,651
Total interest-bearing deposits                                  2,439,451        0.61 %       3,769       2,401,052        0.85 %       5,150
Securities sold under agreements to repurchase                         (25 )         -             -          54,657        0.33 %          46
Borrowings                                                         111,263        1.60 %         447         137,164        1.57 %         543
Total interest-bearing liabilities                               2,550,689        0.66 %       4,216       2,592,873        0.88 %       5,739

Non-interest-bearing deposits                                      382,937                                   323,366
. . .
  Add FBNC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FBNC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.