First Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. First Bancorp is a North Carolina bank holding company. Amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial performance and condition
- Net income: $28.2 million, or $0.99 per diluted share, versus $18.2 million, or $0.62, in Q1 2020. Management attributed the increase mainly to lower credit costs and higher noninterest income.
- Net interest income: $55.2 million, up 0.9% from $54.8 million. Tax-equivalent net interest margin was 3.27%, down 69 basis points from 3.96%.
- Noninterest income and expenses: Noninterest income rose 50.8% to $20.7 million, driven primarily by mortgage activity, SBA consulting fees and SBA loan-sale gains. Noninterest expense was essentially unchanged at $40.1 million.
- Credit costs and asset quality: No provision for credit losses was recorded, compared with $5.6 million in Q1 2020. Net charge-offs were $1.1 million, or 0.10% of average loans annualized, versus $2.5 million, or 0.22%. Nonperforming assets were $50.0 million, or 0.65% of assets, versus $47.0 million at year-end 2020.
- Balance sheet: Total assets were $7.74 billion, up from $7.29 billion at December 31, 2020. Deposits increased 7.3% to $6.73 billion; total loans declined 2.3% to $4.62 billion. Cash and cash equivalents were $530.1 million.
- Cash flow: Operating activities provided $30.7 million; investing activities used $318.1 million, mainly reflecting securities purchases; financing activities provided $450.1 million, chiefly from deposit growth. Cash and cash equivalents increased $162.8 million during the quarter.
- Debt and liquidity: Borrowings were $61.3 million, versus $61.8 million at year-end. Management reported $1.2 billion of unused and available credit lines and liquid assets equal to 37.5% of deposits and borrowings, up from 31.4% at year-end.
- Capital and shareholder returns: The estimated total risk-based capital ratio was 15.49%, versus 15.37% at year-end. The quarterly dividend was $0.20 per share. The company repurchased approximately 106,744 shares for $4.0 million.
Material changes and notable items
- Effective January 1, 2021, the company adopted CECL. Adoption increased the loan-loss allowance by $14.6 million and the allowance for unfunded commitments by $7.5 million; the after-tax cumulative adjustment reduced retained earnings by $17.1 million. The company did not elect regulatory-capital relief for CECL adoption.
- The allowance for loan losses was $65.8 million, or 1.42% of loans, at March 31, compared with $52.4 million, or 1.11%, at year-end. The quarter’s allowance estimate used a more negative economic forecast than the adoption-date estimate; management recorded no additional provision.
- Accumulated other comprehensive income moved from positive $14.4 million at year-end to a loss of $4.2 million, primarily reflecting unrealized declines in available-for-sale securities as longer-term interest rates rose. Management attributed the securities’ unrealized losses primarily to interest rates, not credit concerns, and reported no credit-loss allowance on the available-for-sale portfolio.
- COVID-related loan deferrals had fallen to $5.9 million from a peak of $774 million in June 2020. The company funded $111 million of new PPP loans and processed $111 million of forgiveness payments during Q1; PPP loans outstanding were $241 million at quarter-end.
Outlook, management commentary and risks
- Management expects organic loan growth during the remainder of 2021, excluding PPP forgiveness, as economic activity improves. It also expects continued net interest margin pressure if rates remain broadly unchanged, citing the flat yield curve and lower reinvestment yields.
- Management said the pandemic had contributed to subdued non-PPP loan demand, strong deposit growth and higher mortgage refinancing activity. It had not experienced a meaningful increase in problem loans or charge-offs to date, but warned that government stimulus could mask the pandemic’s full effect on asset quality.
- Key uncertainties include pandemic developments and their economic effects, interest-rate and deposit trends, credit performance, and the forecasts and judgments used to estimate expected credit losses. The filing also identifies acquisition integration, customer strategies and regulatory actions as forward-looking risks.
- The company reported no pending legal proceedings it believed material and no material changes to the risk factors in its 2020 Form 10-K. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit growth persists and can be deployed into loans or investments at yields sufficient to offset margin pressure.
- Whether expected credit losses, nonperforming loans and charge-offs rise as pandemic support recedes, particularly given the more negative CECL forecast and the $5.5 million borrower relationship newly placed on nonaccrual.
- How quickly PPP forgiveness and fee amortization affect reported interest income, and whether mortgage and SBA-related income remain at elevated levels.
- Whether the securities portfolio’s unrealized losses recover or further reduce equity if interest rates rise.
- Whether reported liquidity and capital remain adequate as balance-sheet growth, lending demand and regulatory requirements evolve.