First Bancorp Reports Third Quarter Results

SOUTHERN PINES, N.C. , Oct. 23, 2013 /PRNewswire/ -- First Bancorp (NASDAQ: FBNC), the parent company of First Bank, announced today net income available to common shareholders of $6.1 million, or $0.30 per diluted common share, for the three months ended September 30, 2013, compared to $3.7 million, or $0.22 per diluted common share, recorded in the third quarter of 2012.  For the nine months ended September 30, 2013, the Company recorded net income available to common shareholders of $14.3 million, or $0.71 per diluted common share, compared to net income of $0.3 million, or $0.01 per diluted common share, for the nine months ended September 30, 2012.  The higher earnings were primarily a result of lower provisions for loan losses and lower foreclosed property losses and write-downs recorded during 2013.

Net Interest Income and Net Interest Margin

Net interest income for the third quarter of 2013 amounted to $33.7 million, a 2.2% decrease from the $34.5 million recorded in the third quarter of 2012.  Net interest income for the nine months ended September 30, 2013 amounted to $101.3 million, a 1.7% increase from the $99.5 million recorded in the comparable period of 2012.

The Company's net interest margin (tax-equivalent net interest income divided by average earning assets) in the third quarter of 2013 was 4.84% compared to 4.86% for the third quarter of 2012.  For the nine month period ended September 30, 2013, the Company's net interest margin was 4.88% compared to 4.71% for the same period in 2012.  The 4.84% margin realized in the third quarter of 2013 was a 26 basis point decrease from the 5.10% margin realized in the second quarter of 2013.  The margin variances were primarily due to discount accretion on loans purchased in failed-bank acquisitions recognized during the respective periods.  As shown in the accompanying tables, loan discount accretion amounted to $4.3 million in the third quarter of 2013, $6.6 million in the second quarter of 2013, and $4.6 million in the third quarter of 2012. 

Excluding the effects of discount accretion on purchased loans, the Company's net interest margin has been relatively stable, amounting to 4.23% for the third quarter of 2013, compared to 4.17% for the second quarter of 2013, and 4.22% in the third quarter of 2012.  See the Financial Summary for a table that presents the impact of the loan discount accretion, as well as other purchase accounting adjustments affecting net interest income.  Also see the Financial Summary for a reconciliation of the Company's net interest margin to the net interest margin excluding the loan discount accretion, and the note thereto that explains why this ratio is presented and caution regarding the use of this non-GAAP performance measure.  

The Company's cost of funds has steadily declined from 0.57% in the third quarter of 2012 to 0.37% in the third quarter of 2013.

Provision for Loan Losses and Asset Quality

The Company recorded total provisions for loan losses of $5.0 million in the third quarter of 2013 compared to $7.1 million for the third quarter of 2012.  For the nine months ended September 30, 2013, the Company recorded total provisions for loans losses of $21.7 million compared to $35.1 million for the same period of 2012. As discussed below, the decrease in 2013 was primarily the result of an elevated provision for loan losses on non-covered loans recorded in the first quarter of 2012 – see explanation of the terms "covered" and "non-covered" in the section below entitled "Note Regarding Components of Earnings."

The provision for loan losses on non-covered loans amounted to $3.5 million in the third quarter of 2013 compared to $6.0 million in the third quarter of 2012.  For the first nine months of 2013, the provision for loan losses on non-covered loans amounted to $13.3 million compared to $29.7 million for the same period of 2012.  The decrease for the nine month period was primarily due to a high provision for loan losses recorded in the first quarter of 2012 that resulted from an internal review that applied more conservative assumptions to estimate the probable losses associated with some of the Company's nonperforming loan relationships, which the Company believed could lead to a more timely resolution of the related credits.  Many of these same loans were sold to a third party investor in January 2013, as discussed below. 

The provision for loan losses on covered loans amounted to $1.5 million in the third quarter of 2013 compared to $1.1 million in the third quarter of 2012.  For the nine months ended September 30, 2013, the provision for loan losses on covered loans amounted to $8.4 million compared to $5.4 million for the same period of 2012.  The increase for the nine month period in 2013 was primarily the result of several large credits that deteriorated during the first quarter of 2013 and were placed on nonaccrual status.

Total non-covered nonperforming assets amounted to $83.5 million at September 30, 2013 (2.86% of total non-covered assets), which compares to $106.1 million at December 31, 2012 and $146.0 million at September 30, 2012.  The decrease in 2013 compared to both periods in 2012 was due primarily to a combination of loan sales and foreclosed property write-downs that occurred in the fourth quarter of 2012 and the first quarter of 2013, as discussed in the following paragraph.

In the fourth quarter of 2012, the Company identified a pool of non-covered higher-risk loans that it targeted for sale to a third-party investor.  Based on an offer to purchase these loans that was received in December, the Company wrote the loans down by approximately $38 million in the fourth quarter of 2012 to their estimated liquidation value of approximately $30 million and reclassified them as "loans held for sale."  Of the $68 million in loans targeted for sale, approximately $38.2 million had been classified as nonaccrual loans, and $10.5 million had been classified as accruing troubled-debt-restructurings.  The sale of substantially all of these loans was completed on January 23, 2013.  Additionally, in the fourth quarter of 2012, the Company recorded write-downs totaling $10.6 million on substantially all of its non-covered foreclosed properties in connection with efforts to accelerate the sale of these assets.

Non-covered nonaccrual loans increased from $33.0 million at December 31, 2012 to $40.7 million at September 30, 2013, due primarily to several larger credits that deteriorated during the first and second quarters of 2013.  Non-covered foreclosed real estate decreased from $26.3 million at December 31, 2012 to $15.1 million at September 30, 2013 as a result of strong sales activity during the first nine months of 2013, which was consistent with the Company's strategy discussed above to accelerate the disposition of foreclosed properties.

Total covered nonperforming assets have steadily declined during the past twelve months, amounting to $83.0 million at September 30, 2013 compared to $113.9 million at September 30, 2012.  Within this category, foreclosed real estate declined from $58.4 million at September 30, 2012 to $29.2 million at September 30, 2013.  The Company is experiencing increased property sales activity, particularly along the North Carolina coast, which is where most of the Company's covered foreclosed properties are located.  Covered nonaccrual loans increased from $33.5 million at December 31, 2012 to $47.2 million at September 30, 2013, due primarily to several large loans that deteriorated during the first quarter of 2013.

Noninterest Income

Total noninterest income for the third quarter of 2013 was $5.6 million compared to $2.8 million for the same period of 2012.  For the nine months ended September 30, 2013, noninterest income amounted to $17.2 million compared to $9.9 million for the nine months ended September 30, 2012. 

Core noninterest income for the third quarter of 2013 was $7.5 million, an increase of 10.2% over the $6.8 million reported for the third quarter of 2012.  For the first nine months of 2013, core noninterest income amounted to $21.2 million, a 12.2% increase from the $18.9 million recorded in the comparable period of 2012.  Core noninterest income includes i) service charges on deposit accounts, ii) other service charges, commissions, and fees, iii) fees from presold mortgages, iv) commissions from financial product sales, and v) bank-owned life insurance income.  The largest component of the increases in core noninterest income was in the amount of service charges on deposit accounts recorded by the Company, which related primarily to overdraft fees.

Noncore components of noninterest income resulted in net losses of $1.9 million in the third quarter of 2013 compared to net losses of $4.0 million in the third quarter of 2012.  For the nine months ended September 30, 2013 and 2012, the Company recorded net losses of $4.0 million and $9.0 million, respectively, related to the noncore components of noninterest income.  The largest variances compared to prior periods related to foreclosed property gains/losses and indemnification asset income (expense) – see discussion below. 

Non-covered foreclosed property gains/losses amounted to gains of $0.2 million and $1.7 million for the three and nine months ended September 30, 2013, respectively, compared to losses of $1.0 million and $3.0 million for the comparable periods of 2012.  Stabilization in real estate market values and lower carrying values following the December 2012 write-down discussed above impacted these variances.

Gains/losses on covered foreclosed properties during the three and nine month periods ended September 30, 2013, amounted to gains of $1.4 million and losses of $3.7 million, respectively, compared to losses of $1.6 million and losses of $12.7 million during the comparable periods of 2012, respectively.  The favorable variances in 2013 were primarily a result of lower levels of covered foreclosed properties, as well as stabilization in real estate market values.

As discussed below, indemnification asset income (expense) is recorded to reflect additional (decreased) amounts expected to be received from the FDIC due to covered loan and foreclosed property losses arising during the period.  In the third quarter of 2013, the Company recorded net gains on covered foreclosed properties of $1.4 million compared to net losses of $1.6 million in the third quarter of 2012, which resulted in a higher indemnification asset expense – $3.8 million of expense in the third quarter of 2013 compared to expense of $1.6 million in the third quarter of 2012.  For the nine months ended September 30, 2013, indemnification asset expense amounted to $2.3 million compared to income of $6.1 million for the same period of 2012, with the variance also being caused primarily by fewer covered foreclosed property losses in 2013.

Noninterest Expenses

Noninterest expenses amounted to $23.7 million in each of the third quarters of 2013 and 2012.  Noninterest expenses for the nine months ended September 30, 2013 amounted to $72.7 million compared to $71.5 million recorded in the first nine months of 2012. 

Salaries expense has risen in 2013 as a result of new employees hired to expand the Company's infrastructure in anticipation of future growth, as well as increases in the mortgage division due to an initiative to generate higher residential mortgage volume.  Employee benefits have decreased primarily due to the freezing of two pension plans at December 31, 2012.

Tax Expense

The Company's income tax expense for the third quarter of 2013 was $4.3 million, which resulted in an effective tax rate of 40.5% compared to a more typical effective tax rate of approximately 35%.  The higher effective tax rate was due to an incremental $0.5 million of tax expense that was recorded in the third quarter of 2013 in order to reduce the value of the Company's deferred tax asset as a result of statutory decreases in North Carolina's state income tax rate.

Preferred Dividends

Preferred stock dividends amounted to $0.2 million for the third quarter of 2013 compared to $0.7 million for the third quarter of 2012.  Preferred stock dividends amounted to $0.7 million for the first nine months of 2013 compared to $2.3 million for the comparable period of 2012.  The decreases in 2013 are a result of a favorable dividend rate change related to the preferred stock that was issued in September 2011 to the US Treasury as part of the Company's participation in the Treasury's Small Business Lending Fund.  The dividend rate can vary from 1% to 5% per annum based upon changes in the Company's level of small business lending.  The Company has been able to continually increase its level of small business lending and as a result, the dividend rate has steadily decreased from 5.0% in the first half of 2012 to 1.0% throughout most of 2013.  We expect our preferred stock dividend rate to remain at an annualized rate of 1.0% until 2016, unless the preferred stock is redeemed at an earlier date.

Balance Sheet and Capital

Total assets at September 30, 2013 amounted to $3.2 billion, a 4.5% decrease from a year earlier.  Total loans at September 30, 2013 amounted to $2.4 billion, unchanged from a year earlier, and total deposits amounted to $2.7 billion at September 30, 2013, a 3.3% decrease from a year earlier. 

The unchanged level of total loans at September 30, 2013 compared to a year earlier was primarily the result of the loan sale previously discussed, the impact of which was offset by new loan growth.  Total loans have increased in 2013, as growth in non-covered loans has exceeded the steady decline in covered loans.  Excluding the acquired growth of $16 million that was added in a March 2013 branch acquisition, the Company's non-covered loans have increased by $105 million since December 31, 2012, representing annualized growth of 6.7%.  The Company is seeing improved loan demand as the economy in its market areas improves.

Deposit balances have generally decreased over the past year as a result of declines in all time deposit categories, including brokered deposits, internet deposits, and all other time deposits.  Strong growth in transaction deposit accounts has offset a majority of the time deposit declines.

As previously reported, during the first quarter of 2013, the Company completed the acquisition of two branches from Four Oaks Bank & Trust Company, which resulted in the addition of $16 million in loans and $57 million in deposits.

The Company remains well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio at September 30, 2013 of 16.61% compared to the 10.00% minimum required to be considered well-capitalized.  The Company's tangible common equity to tangible assets ratio was 7.19% at September 30, 2013, an increase of 73 basis points from a year earlier.

Comments of the President and Other Business Matters

Richard H. Moore, President and CEO of First Bancorp, commented, "Our strong quarterly earnings for the third quarter of 2013 represent a continuation of the positive momentum we have seen during 2013.  We are thankful that our local markets are continuing to improve and that First Bank is able to help our customers meet their growing financial needs."

The following is a list of business development and other miscellaneous matters affecting the Company:

• On September 13, 2013, the Company announced a quarterly cash dividend of $0.08 cents per share payable on October 25, 2013 to shareholders of record on September 30, 2013.  This is the same dividend rate as the Company declared in the third quarter of 2012.
• In the fourth quarter of 2013, the Company expects to open loan production offices in Charlotte, North Carolina and Columbia, North Carolina.

Note Regarding Components of Earnings

The Company's results of operation are significantly affected by the on-going accounting for two FDIC-assisted failed bank acquisitions.  In the discussion above, 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.

For covered loans that deteriorate in terms of repayment expectations, the Company records 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, the Company records positive adjustments to interest income over the life of the respective loan – also referred to as loan discount accretion.  For covered foreclosed properties that are sold at gains or losses or that are written down to lower values, the Company records 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.

First Bancorp is a bank holding company headquartered in Southern Pines, North Carolina with total assets of approximately $3.2 billion.  Its principal activity is the ownership and operation of First Bank, a state-chartered community bank that operates 96 branches, with 81 branches operating in North Carolina, 7 branches in South Carolina (Cheraw, Dillon, Florence, and Latta), and 8 branches in Virginia (Abingdon, Blacksburg, Christiansburg, Dublin, Fort Chiswell, Radford, Salem and Wytheville), where First Bank does business as First Bank of Virginia. First Bank also has a loan production office in Greenville, North Carolina. First Bancorp's common stock is traded on the NASDAQ Global Select Market under the symbol "FBNC."

Please visit our website at www.FirstBancorp.com.

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties.  Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact.  Such statements are often characterized by the use of qualifying words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate," or other statements concerning opinions or judgments of the Company and its management about future events.  Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company's customers, the Company's level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions.  For additional information about the factors that could affect the matters discussed in this paragraph, see the "Risk Factors" section of the Company's most recent annual report on Form 10-K available at www.sec.gov. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update or revise forward-looking statements.  The Company is also not responsible for changes made to the press release by wire services, internet services or other media.

SOURCE First Bancorp