First Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. First Bancorp is a North Carolina bank holding company; its common stock trades on Nasdaq as FBNC. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $58.8 | $52.6 | $114.0 | $107.4 |
| Provision for credit losses | $1.9 | $19.3 | $1.9 | $24.9 |
| Noninterest income | $21.4 | $26.2 | $42.0 | $39.9 |
| Noninterest expense | $41.0 | $38.9 | $81.1 | $79.0 |
| Net income | $29.3 | $16.4 | $57.5 | $34.5 |
| Diluted EPS | $1.03 | $0.56 | $2.02 | $1.18 |
- Q2 diluted EPS increased 83.9% year over year; first-half diluted EPS increased 71.2%. Management attributed higher earnings primarily to lower credit costs than in 2020.
- Tax-equivalent net interest margin was 3.22% in Q2 versus 3.49% a year earlier, and 3.24% for the first half versus 3.71%. Higher earning-asset balances, PPP fee income and loan discount accretion lifted net interest income, partly offset by margin compression.
- Q2 noninterest income declined 18.4%, mainly because Q2 2020 included $8.0 million of securities gains. First-half noninterest income rose, supported by bankcard fees, mortgage activity, SBA loan-sale gains and the insurance-agency sale.
- Annualized net charge-offs to average loans were 0.07% for Q2 and 0.08% for the first half. No provision for loan losses was recorded in either 2021 period; Q2 included a $1.9 million provision for unfunded commitments.
Financial position, cash flow and capital
- At June 30, total assets were $8.20 billion, up 12.5% from year-end 2020. Deposits were $7.17 billion, up $898 million (14.3%); total loans were $4.78 billion, up $51 million (1.1%). Excluding PPP loan decreases associated with forgiveness, first-half loan growth was $136 million, or 6.1% annualized; non-PPP loans grew $244 million in Q2.
- Cash and cash equivalents were $475 million, versus $367 million at December 31. Securities totaled about $2.41 billion. The liquid-assets-to-deposits-and-borrowings ratio rose to 39.9% from 31.4%. Available unused credit lines were $1.2 billion.
- Six-month cash flows: $81.1 million provided by operations, $855.1 million used in investing, and $881.9 million provided by financing; cash increased $107.9 million. Deposit growth largely funded the increase in securities and cash.
- Borrowings were $61.3 million, down slightly from $61.8 million at year-end. The reported weighted-average rate on gross borrowings was 2.17%; the balance includes trust preferred securities.
- Total risk-based capital was 15.05% at June 30 versus 15.37% at year-end; Tier 1 leverage was 9.43% versus 9.88%. Management said the company remained above regulatory minimums. The quarterly dividend was $0.20 per share, up from $0.18 in Q2 2020.
Material changes, outlook and risks
- CECL adoption: Effective January 1, 2021, the new expected-credit-loss method increased the loan allowance by $14.6 million and the unfunded-commitment allowance by $7.5 million. The after-tax $17.1 million transition adjustment reduced opening retained earnings. June 30 loan allowance was $65.0 million, or 1.36% of loans; the unfunded-commitment allowance was $10.0 million.
- Management based its March and June CECL estimates primarily on a more negative alternative economic forecast, citing forecast volatility and uncertainty. It said improving forecast conditions were substantially offset by loan growth and higher qualitative risk adjustments related to less conservative loan structures.
- Nonperforming assets were $41.8 million, or 0.51% of assets, versus $47.0 million, or 0.64%, at year-end. Management attributed much of the decline to the sale of a $5.6 million nonaccrual relationship. It cautioned that government support may mean current asset-quality measures do not show the pandemic’s full effect. Remaining pandemic-related deferrals were $2.1 million.
- COVID-19 effects had lessened and management reported a recovery in local economic activity, but noted uncertainty from more transmissible virus strains. It expected continued near-term net interest margin pressure if rates remained low and the yield curve flat; it gave no specific earnings or financial forecast.
- On June 30, the company completed the sale of First Bank Insurance Services for an initial stated purchase price of $13.0 million, with a potential earn-out of up to $1.0 million. It recorded a $1.7 million gain and derecognized $10.2 million of related goodwill and other intangibles. The purchase price was recorded as a receivable at quarter-end; $11.9 million cash and a $0.6 million interest were received July 1, with $0.5 million cash due in Q4.
- The company agreed to acquire Select Bancorp in an all-stock transaction valued at approximately $314.3 million based on the stated reference price. The deal was expected to close in Q4 2021, subject to regulatory and shareholder approvals; it was not yet completed at the reporting date.
- Management identified credit-loss estimates and intangible-asset valuation as significant judgment areas. Other stated risks include customer and economic conditions, acquisition integration, regulation, interest rates and pandemic developments. Management reported effective disclosure controls; it reported no material change in internal control over financial reporting and no material pending legal proceeding.
Key facts for investors to verify
- Whether loan growth, deposit growth and the mix of cash and securities can support earnings without further material net interest margin compression.
- How PPP fee recognition and acquired-loan discount accretion affect reported interest income, including their timing and sustainability.
- Whether credit quality remains favorable as pandemic relief recedes, and whether the CECL allowance and $10.0 million unfunded-commitment reserve remain adequate.
- Completion, final consideration, integration costs and realized benefits of the Select Bancorp acquisition; and final cash/earn-out proceeds from the insurance-agency sale.
- Capital and liquidity trends, especially as assets and deposits grow, and any effects of interest-rate changes on securities values and earnings.