First Bancorp Reports Fourth Quarter and Annual Earnings

TROY, N.C., Jan. 31, 2012 /PRNewswire/ -- First Bancorp (NASDAQ - FBNC), the parent company of First Bank, announced today net income available to common shareholders of $0.2 million, or $0.01 per diluted common share, for the three months ended December 31, 2011 compared to a net loss available to common shareholders of $3.3 million, or ($0.19) per diluted common share, for the same period in 2010.  For the year ended December 31, 2011, net income available to common shareholders amounted to $7.5 million, or $0.44 per diluted common share, compared to $5.9 million, or $0.35 per diluted common share, for the year ended December 31, 2010.

In each of the fourth quarters of 2011 and 2010, the Company experienced significant write-downs and losses associated with loans and foreclosed properties that were assumed in two failed bank acquisitions.  The amounts of the write-downs and losses were less in 2011 than in 2010, but continued to significantly impact the Company's earnings.  The Company obtains annual updates of appraisal values for a significant amount of its collateral dependent problem loans and foreclosed properties in the fourth quarter of the calendar year.  The vast majority of these losses related to the Company's June 2009 failed bank acquisition of Cooperative Bank.

The following significant factors also affect the comparability of the full year 2011 and 2010 results:

• In the first quarter of 2011, the Company realized a $10.2 million bargain purchase gain related to the acquisition of The Bank of Asheville in Asheville, North Carolina.  This gain resulted from the difference between the purchase price and the acquisition-date fair values of the acquired assets and liabilities.  The after-tax impact of this gain was $6.2 million, or $0.37 per diluted common share.  

• In the third quarter of 2011, the Company recorded $2.3 million of accelerated accretion of the discount remaining on the preferred stock that was redeemed during the quarter.  This stock was originally issued to the U.S. Treasury in January 2009 as part of the program known as TARP.  When this preferred stock was redeemed, the remaining discount that was recorded upon the issuance of the stock, which had been on a five year accretion schedule, was immediately accreted as a reduction to net income available to common shareholders.  Total discount accretion of the preferred stock in 2011 was $2.9 million, or $0.17 per diluted common share.  As of December 31, 2011, there are no remaining preferred stock discounts on the Company's balance sheet.

Note Regarding Components of Earnings

In addition to the gain related to The Bank of Asheville acquisition, the Company's results of operation are significantly affected by the on-going accounting for the two FDIC-assisted failed bank acquisitions that the Company has completed.  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.

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 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% due to the corresponding adjustments made to the indemnification asset.

Net Interest Income and Net Interest Margin

Net interest income for the fourth quarter of 2011 amounted to $31.9 million, a decrease of $1.7 million, or 4.9%, from the $33.6 million recorded in the fourth quarter of 2010.  Net interest income for the year ended December 31, 2011 amounted to $132.2 million, an increase of $4.8 million, or 3.8%, from the $127.4 million recorded in the comparable period of 2010.  

The variances in net interest income for both periods were primarily caused by fluctuations in the amounts of discount accretion on loans purchased in failed bank acquisitions recognized during the respective periods.  Loan discount accretion amounted to $1.7 million in the fourth quarter of 2011 compared to $3.2 million in the fourth quarter of 2010, a decline of $1.5 million.  Loan discount accretion amounted to $11.6 million for full year 2011 compared to $7.6 million in 2010, an increase of $4.0 million.  As previously discussed, the impact of the changes in discount accretion on pretax income is only 20% of the gross amount of the change.  See page 5 of the Financial Summary for a table that presents the impact of the purchase accounting adjustments, including discount accretion on purchased loans.  

The Company's net interest margin (tax-equivalent net interest income divided by average earning assets) for the fourth quarter of 2011 was 4.55% compared to 4.79% for the fourth quarter of 2010.  The lower margin was primarily due to the aforementioned decrease in loan discount accretion.  For the full year 2011, the Company's net interest margin was 4.72% compared to 4.39% for 2010.  The higher margin was due to higher amounts of loan discount accretion, as well as an improvement in funding costs.

Provision for Loan Losses and Asset Quality

The Company's provisions for loan losses remain at elevated levels, primarily due to continued high unemployment rates and ongoing declines in property values in its market area that negatively impact collateral dependent real estate loans. The Company's provision for loan losses for non-covered loans amounted to $6.9 million in the fourth quarter of 2011 compared to $9.6 million in the fourth quarter of 2010.  For the year ended December 31, 2011, the provision for loan losses for non-covered loans was $28.5 million compared to $33.6 million for the comparable period of 2010.  The lower provisions in 2011 are primarily due to stabilization in overall loan quality and lower levels of non-covered nonperforming loans.

The Company's provision for loan losses for covered loans amounted to $3.0 million and $12.8 million for the three and twelve months ended December 31, 2011, respectively, compared to $20.9 million recorded for both the three and twelve months ended December 31, 2010.  The lower provisions in 2011 were due to declines in covered nonperforming loans resulting from the resolution of these loans through a combination of charge-offs and foreclosures.  All of the provisions for loan losses on covered loans in 2010 and most of the provisions in 2011 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 have remained fairly stable over the past five quarter ends, ranging from $116 million to $122 million, or approximately 4.3% of total non-covered assets.  Covered nonperforming assets have generally declined over that same period, amounting to $141 million at December 31, 2011 compared to $168 million at December 31, 2010.

Noninterest Income

Total noninterest income was $3.4 million in the fourth quarter of 2011 compared to $14.9 million for the fourth quarter of 2010.  For the years ended December 31, 2011 and 2010, the Company recorded noninterest income of $26.2 million and $29.1 million, respectively.  The decline in noninterest income for both periods in 2011 is due to lower amounts of indemnification asset income recorded.  As previously discussed, when the Company anticipates receiving additional amounts from the FDIC because of new losses identified in its covered loan and foreclosed property portfolios, the Company records indemnification asset income for 80% of the expected loss.  In 2011, fewer new losses were identified compared to 2010, and thus less indemnification asset income was recorded.

Within noninterest income, service charges on deposits declined for the year ended December 31, 2011, amounting to $12.0 million in 2011 compared to $12.3 million in 2010.  This decline was primarily attributable to lower overdraft fees, which began declining in the second half of 2010 partially as a result of new regulations that took effect in the third quarter of 2010 that limit the Company's ability to charge overdraft fees.  Service charges on deposit accounts recorded in the fourth quarter of 2011 amount to $3.0 million, or approximately $0.3 million higher than they were in the fourth quarter of 2010.  Revenue that was lost in 2010 was substantially replaced by new fees on deposit accounts that took effect April 1, 2011.

Other service charges, commissions and fees amounted to $2.0 million in the fourth quarter of 2011 compared to $1.6 million in the fourth quarter of 2010.  For the twelve months ended December 31, 2011, this line item totaled $8.1 million compared to $6.5 million in the comparable period of 2010.  The increases in 2011 are primarily attributable to increased debit card usage by the Company's customers.  The Company earns a small fee each time its customers make a debit card transaction.  

The Company continues to experience losses and write-downs on its foreclosed properties due to declining property values in its market area.  For the fourth quarter of 2011, these losses amounted to $11.8 million for covered properties compared to $22.7 million in the fourth quarter of 2010.  For the year ended December 31 2011, losses on covered properties amounted to $24.5 million compared to $34.5 million for the same period in 2010.

Losses on non-covered foreclosed properties amounted to $0.8 million for the fourth quarter of 2011 compared to $0.9 million in 2010.  For the twelve months ended December 31, 2011, losses on non-covered foreclosed properties amounted to $3.4 million compared to $1.0 million for the comparable period of 2010.  

As previously discussed, indemnification asset income is recorded to reflect additional amounts expected to be received from the FDIC due to covered loan and foreclosed property losses arising during the period.  For the fourth quarter of 2011, indemnification asset income totaled $10.0 million compared to $32.3 million the fourth quarter of 2010.  For the year ended December 31, 2011, indemnification asset income amounted to $20.5 million compared to $41.8 million for the same period of 2010.

As previously discussed, in the first quarter of 2011, the Company recorded a $10.2 million bargain purchase gain related to the acquisition of The Bank of Asheville.

Noninterest Expenses

Noninterest expenses amounted to $24.2 million in the fourth quarter of 2011, a 9.9% increase over the $22.0 million recorded in the same period of 2010.  Noninterest expenses for the twelve months ended December 31, 2011 amounted to $96.1 million, a 10.5% increase from the $87.0 million recorded in 2010.

Personnel expense increased in 2011 due to employees joining the Company in The Bank of Asheville acquisition, as well as higher employee medical expense due to higher claims.  Also, the Company has progressively built its infrastructure to manage increased compliance burdens, collection activities and overall growth of the Company that has generally resulted in higher expenses across all categories.

Two of the largest overhead expenses for the Company are collection expenses and FDIC insurance expense. Collection expenses on non-covered assets amounted to $0.9 million and $3.5 million for the three and twelve months ended December 31, 2011, respectively, compared to $0.7 million and $2.1 million for the comparable periods in 2010.  Collection expenses on covered assets (net of FDIC reimbursement) were approximately the same in 2011 as they were in 2010, amounting to approximately $1.0 million for the fourth quarters of 2011 and 2010 and $2.9 million for the full years of 2011 and 2010.

FDIC insurance expense amounted to $0.7 million and $3.1 million for the three and twelve months ended December 31, 2011, respectively, compared to $1.1 million and $4.4 million for the comparable periods in 2010. The decreases in FDIC insurance expense in 2011 were due to a change in the FDIC's assessment methodology effective April 1, 2011 that was favorable for the Company.

There were no individually significant unusual items of expense in the fourth quarter of 2011.  For the full year 2011, the Company experienced a fraud loss that amounted to $1.0 million and merger expenses that amounted to $0.6 million.  

Balance Sheet and Capital

Total assets at December 31, 2011 amounted to $3.3 billion, a 0.4% increase from a year earlier.  Total loans at December 31, 2011 amounted to $2.4 billion, a 1.0% decrease from a year earlier, and total deposits amounted to $2.8 billion at December 31, 2011, a 3.9% increase from a year earlier.

Since the onset of the recession, the Company has generally experienced declines in loans and deposits.  Normal loan paydowns and loan foreclosures have exceeded new loan growth, which has provided the liquidity to lessen reliance on high cost deposits.   However, for the past two quarters this trend has reversed and the Company has experienced sequential growth in its non-covered loan portfolio, which increased $18 million in the third quarter of 2011 and $10 million in the fourth quarter of 2011.  The Company is actively pursuing lending opportunities in order to improve its asset yields, as well as to potentially decrease the dividend rate on its preferred stock, as discussed in the following paragraph.

In September 2011, the Company issued $63.5 million in preferred stock to the U.S. Treasury as part of the Company's participation in the Small Business Lending Fund ("SBLF").  The goal of the SBLF is to incentivize healthy banks to make loans to small businesses.  Depending on our success in making small business loans, the dividend rate on the preferred stock could range from 5% to as low as 1% for several years.  For the first quarter of 2012, the Company expects to pay a dividend rate of 4.8%.

The Company remains well-capitalized by all regulatory standards, with a Total Risk-Based Capital Ratio of 16.72% compared to the 10.00% minimum to be considered well-capitalized.  The Company's tangible common equity to tangible assets ratio was 6.58% at December 31, 2011, an increase of six basis points from a year earlier.  The Company's equity was negatively impacted in the fourth quarter of 2011 by a $4.8 million increase in accumulated other comprehensive loss that was caused by an increase in the Company's pension liability.  The increase in the pension liability was due to the impact of lower interest rates on the actuarial calculations involved in determining the liability.

Comments of the President and Other Business Matters

Jerry L. Ocheltree, President and CEO of First Bancorp, commented on today's report, "Considering the economic challenges faced by our market areas in 2011, I am pleased to report net income for the year of approximately $7.5 million.  Also, in the last half of 2011, we experienced almost $30 million of growth in our legacy loan portfolio.  We are hopeful that this growth continues.  First Bancorp remains very strong financially, and we are doing everything we can to improve the economy by lending to qualified borrowers.  In addition, we continue to provide free checking account options and free debit cards to our customers, which I know are appreciated."

Mr. Ocheltree noted the following other corporate developments:

• On December 5, 2011, the Wilmington, North Carolina Hanover Center branch re-opened after extensive renovations.

• On March 5, 2012, the Kill Devil Hills, North Carolina branch located at 2007 S. Croatan Highway will re-open after extensive renovations.  The temporary location at 5000 S. Croatan Highway will close on that same date.

• The Company has received regulatory approvals to open a branch in Salem, Virginia and to relocate its branch in Fort Chiswell, Virginia.  Both are expected to occur in the spring of 2012.

• On October 24, 2011, the Company reported that it had reached an agreement to purchase eleven coastal branches from Waccamaw Bank, headquartered in Whiteville, North Carolina.  The application for regulatory approval for this transaction has been submitted and is pending.

• On December 13, 2011, the Company announced a quarterly cash dividend of $0.08 cents per share payable on January 25, 2012 to shareholders of record on December 31, 2011.  This is the same dividend rate as the Company declared in the fourth quarter of 2010.

First Bancorp is a bank holding company headquartered in Troy, North Carolina with total assets of approximately $3.3 billion.  Its principal activity is the ownership and operation of First Bank, a state-chartered community bank that now operates 97 branches, with 82 branches operating in North Carolina, 9 branches in South Carolina (Cheraw, Dillon, Florence, Latta, Jefferson, and Little River), and 6 branches in Virginia (Abingdon, Christiansburg, Dublin, Fort Chiswell, Radford, and Wytheville), where First Bank does business as First Bank of Virginia. First Bank also has a loan production office in Blacksburg, Virginia. 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.

SOURCE First Bancorp