First Bancorp — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020. First Bancorp is a North Carolina-based bank holding company. Comparisons below are with the third quarter or first nine months of 2019, or with December 31, 2019 for balance-sheet measures, as indicated. Amounts are in U.S. dollars.
Key financial metrics
| Metric | Q3 2020 / September 30, 2020 | Comparison |
|---|---|---|
| Net income | $23.3 million; diluted EPS $0.81 | Q3 2019: $25.0 million; $0.84 per diluted share |
| Net interest income | $54.7 million | Q3 2019: $53.8 million |
| Tax-equivalent net interest margin | 3.48% | Q3 2019: 3.95% |
| Noninterest income / expense | $21.5 million / $40.4 million | Q3 2019: $15.2 million / $38.4 million |
| Loans / deposits | $4.81 billion / $6.06 billion | Loans up 8.1% and deposits up 22.9% from year-end 2019 |
| Allowance for loan losses | $49.2 million; 1.02% of loans | December 31, 2019: $21.4 million; 0.48% of loans |
| Nonperforming assets | $44.3 million; 0.63% of assets | December 31, 2019: $37.8 million; 0.62% |
| Cash and cash equivalents | $397.2 million | December 31, 2019: $231.3 million |
| Borrowings | $61.8 million | December 31, 2019: $300.7 million |
| Regulatory capital | Total risk-based capital 15.01%; CET1 12.89%; leverage 10.13% | Total risk-based capital at year-end 2019: 14.89% |
Nine-month results: Net income was $57.8 million, or $1.99 per diluted share, versus $71.2 million, or $2.39, in 2019. Net interest income was $162.1 million versus $161.5 million; tax-equivalent margin was 3.63% versus 4.02%. Provision for loan losses was $31.0 million, compared with a $0.9 million provision reversal in 2019. Net cash provided by operating activities was $34.0 million; investing activities used $702.4 million and financing activities provided $834.3 million. Cash increased $165.9 million from year-end.
Material changes and drivers
- Q3 net income declined about 7% year over year; nine-month net income declined about 19%. COVID-19-related credit provisioning and lower interest rates weighed on earnings.
- Net interest income rose modestly, supported by growth in interest-earning assets, but margin contracted as asset yields fell more than funding costs. Management reported Q3 margin was broadly stable sequentially at 3.48%, versus 3.49% in Q2.
- Noninterest income increased, helped by elevated mortgage activity and PPP-related SBA consulting fees. Nine-month results also included an $8.0 million gain on securities sold in Q2. Deposit service charges declined, which the company attributed partly to fewer overdrafts.
- Loan balances increased by $360 million from year-end, including approximately $245 million of PPP loans. Excluding PPP, loan growth was $100.7 million, including loans acquired with Magnolia Financial.
- Deposits rose $1.13 billion from year-end, which management attributed to PPP proceeds, stimulus payments, customer saving behavior, and deposit initiatives. The company used excess funding to reduce borrowings by $239 million and increase securities holdings.
- COVID-19 payment deferrals fell from $774 million across 1,483 loans at June 30 to $186 million across 207 loans at September 30. Most borrowers had resumed normal payments; approximately $158 million of remaining deferrals were second deferrals.
Outlook, risks and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management expected near-term loan growth, excluding PPP, but at a lower-than-usual pace due to the pandemic. It anticipated continued margin pressure from the flat yield curve and lower rates on maturing assets, potentially partly offset by lower funding costs.
- Credit and pandemic risk: Management said the full effect of COVID-19 remained uncertain and warned that business closures, unemployment, and borrowers’ inability to resume payments could increase credit losses and reduce interest income. Deferrals and relief programs may mean reported problem assets do not yet reflect the full impact. The $49.2 million allowance included $22.1 million of COVID-related qualitative reserves.
- CECL: The company elected to defer CECL adoption under the CARES Act. It estimated an initial allowance for credit losses of approximately $40–$44 million upon adoption, compared with a $21 million loan-loss allowance at December 31, 2019; the expected opening adjustment was to retained earnings. The filing describes the effective adoption timing as dependent on the national emergency or December 31, 2020.
- Acquisition: On September 1, 2020, the company acquired Magnolia Financial for approximately $10.0 million, including $9.5 million cash and 24,096 shares. It acquired $14.6 million of loans and initially recorded a $6.6 million intangible amount as goodwill, subject to valuation work.
- Capital and shareholder returns: Management said the company and bank remained well-capitalized and liquidity was adequate. The quarterly dividend was increased to $0.18 per share from $0.12 a year earlier. The company repurchased 985,795 shares for $28.7 million during the first nine months and had $11.3 million remaining under its authorization at September 30.
- Other matters: Management reported no material pending legal proceedings, no material changes to previously reported risk factors other than pandemic-related risks, and effective disclosure controls. Goodwill impairment analyses through September 30 found no impairment.
Important facts for investors to verify
- Whether remaining COVID-19 deferrals convert to resumed payments, delinquencies, or losses, and whether the allowance adequately reflects that risk.
- The timing and final accounting and capital effects of CECL adoption, including the estimated opening allowance adjustment.
- Whether deposit growth persists and how excess liquidity is deployed as PPP balances and stimulus-related deposits change.
- Whether low rates and the flat yield curve continue to pressure net interest margin and earnings.
- The final purchase accounting and performance of Magnolia Financial, including any reclassification of the initially recorded goodwill.
- Whether mortgage and PPP-related fee income, securities gains, and other elevated noninterest income prove sustainable; the filing does not provide a clear forecast for these items.