First Bancorp — Q1 2020 Form 10-Q
Business context and period. First Bancorp is a North Carolina-based bank holding company. This unaudited report covers the three months ended March 31, 2020; income and cash-flow comparisons are with Q1 2019, while balance-sheet comparisons are primarily with December 31, 2019. The quarter closed amid the COVID-19 disruption.
Key financial results
| Metric | Q1 2020 / March 31, 2020 | Comparable period |
|---|---|---|
| Net interest income | $54.8 million | $53.4 million, Q1 2019; up 2.6% |
| Net interest margin, tax-equivalent | 3.96% | 4.06%, Q1 2019 |
| Noninterest income | $13.7 million | $14.1 million, Q1 2019 |
| Noninterest expense | $40.1 million | $38.8 million, Q1 2019 |
| Provision for loan losses | $5.6 million | $0.5 million, Q1 2019 |
| Net income / diluted EPS | $18.2 million / $0.62 | $22.3 million / $0.75, Q1 2019 |
| Operating cash flow | $13.7 million | $17.0 million, Q1 2019 |
| Total assets | $6.38 billion | $6.14 billion, Dec. 31, 2019 |
| Loans / deposits | $4.55 billion / $5.04 billion | $4.45 billion / $4.93 billion, Dec. 31, 2019 |
| Cash and cash equivalents | $376.3 million | $231.3 million, Dec. 31, 2019 |
| Borrowings | $402.2 million | $300.7 million, Dec. 31, 2019 |
The allowance for loan losses was $24.5 million, or 0.54% of loans, versus $21.4 million, or 0.48%, at year-end. Net charge-offs were $2.5 million (0.22% of average loans, annualized), compared with $0.4 million (0.04%) in Q1 2019. Nonperforming assets were $38.3 million, or 0.60% of assets, versus $37.8 million, or 0.62%, at year-end.
Liquidity strengthened: cash and securities equaled 22.8% of deposits and borrowings, up from 21.4% at year-end; unused and available credit lines were $814 million. Regulatory capital ratios remained above stated minimums: common equity Tier 1 12.86%, Tier 1 13.98%, total risk-based capital 14.51%, and leverage 11.05%.
Material changes and drivers
- Net income declined 18.4% year over year and diluted EPS fell 17.3%, principally because the loan-loss provision rose to $5.6 million, including approximately $4.3 million tied to COVID-19 risk.
- Net interest income grew with higher earning-asset balances, but margin contracted 10 basis points year over year. Management cited falling rates: asset yields declined more than funding costs.
- Noninterest income edged lower. Mortgage fees rose to $1.8 million from $0.5 million, while SBA loan-sale gains fell to $0.6 million from $2.1 million. Planned sales of $18.4 million in SBA loans did not close in late March; those loans were classified as held for sale.
- Noninterest expense rose 3.4%, including higher personnel and operating costs. Other comprehensive income was $16.1 million, largely reflecting unrealized gains on available-for-sale securities; this is not net income.
- Loans grew $99.2 million and deposits $113.6 million during the quarter. Financing cash flow included $150 million in long-term borrowing proceeds and $20 million of share repurchases. The company repurchased 576,406 shares at an average $34.70, then suspended repurchases in March.
Outlook, risks and unusual items
- Management expected continued loan growth in 2020 and a moderate net interest margin decline for the remainder of the year, citing the full-quarter effect of March rate cuts. No specific full-year earnings guidance is provided.
- COVID-19 effects remained uncertain. By March 31, the company had processed deferrals on 315 loans totaling $120 million; through April 30, this increased to 1,269 loans totaling $647 million. Deferrals were generally up to 90 days and were excluded from reported troubled debt restructurings and past-due totals.
- In April and early May, the company approved 2,799 Paycheck Protection Program loans totaling about $249.5 million; $208.0 million was funded by May 6. Management estimated approximately $10.6 million of related origination fees, subject to amortization and possible acceleration on repayment or forgiveness.
- The company identified about $553 million of loans in industries considered most exposed to COVID-19, including hospitality, restaurants, retail, childcare and entertainment, plus credit cards. Further economic deterioration could increase credit losses, nonperforming assets, and lost interest income.
- The company elected under the CARES Act to defer CECL adoption. It estimated an initial allowance for credit losses of approximately $40–$44 million upon adoption, compared with about $21 million in loan-loss allowance at December 31, 2019; the initial impact was expected to be recorded through retained earnings. The timing of adoption was subject to the permitted deferral.
- COVID-related market volatility triggered an interim goodwill impairment analysis; no impairment was recorded as of March 31. A roughly $0.5 million SBA servicing-asset impairment was recorded. Management stated liquidity was adequate and capital remained strong; it also warned that economic and credit conditions could worsen. No pending legal proceeding was identified as material.
Important facts for investors to verify
- Whether COVID-related deferrals resume contractual payments, and how borrower stress affects criticized loans, charge-offs, and future provisions.
- CECL adoption timing and the realized allowance and capital impact compared with the company’s estimate.
- PPP loan funding, forgiveness and repayment patterns, and the timing and recognition of associated fees.
- Whether lower rates and the flat or inverted yield curve cause margin compression beyond management’s stated outlook.
- Liquidity and refinancing capacity as short-dated FHLB term notes mature, alongside deposit trends and increased borrowings.
- Whether at-risk industries, SBA loan-sale activity, and the SBA servicing asset produce further credit or valuation effects.