First Bancorp — Q3 2021 Form 10-Q
Business context and reporting period. First Bancorp is a bank holding company headquartered in North Carolina. This filing covers the quarter and nine months ended September 30, 2021; financial results are compared with the corresponding 2020 periods. The October 15, 2021 Select Bancorp acquisition occurred after quarter-end and is not included in the reported results.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $58.6m | $54.7m | $172.6m | $162.1m |
| Net income | $27.6m | $23.3m | $85.1m | $57.8m |
| Diluted EPS | $0.97 | $0.81 | $2.99 | $1.99 |
| Noninterest income | $16.5m | $21.5m | $58.6m | $61.4m |
| Noninterest expense | $40.8m | $40.4m | $121.9m | $119.4m |
- Margins and credit costs: Tax-equivalent net interest margin was 3.03% in Q3, down from 3.48%; for the first nine months it was 3.17%, versus 3.63%. Q3 loan-loss provision was a $1.4m reversal, compared with $6.1m of provision in Q3 2020. Including unfunded commitments, total credit-loss provision was a $0.4m reversal for Q3 and $1.6m of expense year to date.
- Balance sheet at September 30: Assets were $8.49bn, up 16.5% from year-end 2020; loans were $4.87bn, up 2.9%; deposits were $7.43bn, up 18.5%. Investment securities totaled about $2.67bn. Borrowings were $60.8m.
- Liquidity and capital: Cash and cash equivalents were $394.2m. Liquid assets as a share of deposits and borrowings rose to 40.9% from 31.4% at December 31, 2020. The company reported $1.2bn of unused and available credit lines. Total risk-based capital was 14.77% and Tier 1 leverage was 9.30%; both exceeded stated regulatory minimums.
- Cash flows, nine months: Operating activities provided $111.2m, investing activities used $1.22bn, and financing activities provided $1.14bn. Cash and cash equivalents increased $26.9m to $394.2m.
- Asset quality: Nonperforming assets were $40.7m, or 0.48% of assets, versus $47.0m, or 0.64%, at year-end 2020. Nonperforming loans were 0.80% of loans; the allowance for loan losses was 1.31% of loans. Net charge-offs were 0.05% of average loans annualized for the first nine months.
Material changes versus the prior comparable period
- Net income rose 18.7% in Q3 and 47.2% year to date, primarily reflecting substantially lower credit costs than in 2020. Diluted EPS increased 19.8% in Q3 and 50.3% year to date.
- Net interest income increased as higher earning-asset balances and PPP fee amortization more than offset margin compression. Lower market rates and reinvestment yields, alongside rapid deposit growth, pressured margins.
- Noninterest income declined 23.0% in Q3 and 4.6% year to date. Q3 mortgage fees, insurance commissions, SBA consulting fees and SBA loan-sale gains were lower; the 2020 comparison included $8.0m of securities gains. Year-to-date bankcard fees increased.
- Deposits grew rapidly, with management attributing growth to pandemic stimulus, customer behavior, flight-to-quality deposits and company initiatives. Excess liquidity was deployed partly into securities.
- The company adopted CECL on January 1, 2021, recording a $17.1m after-tax reduction to retained earnings, including increases of $14.6m in the loan allowance and $7.5m in the unfunded-commitment allowance.
Outlook, commentary and risks
- Management said local markets were recovering and reported strong non-PPP loan growth in Q2 and Q3. It nevertheless described the future effects of COVID-19, including new variants, as uncertain. Remaining pandemic-related loan deferrals were $1.8m.
- Management expects continued net interest margin pressure if rates remain broadly unchanged, due to the flat yield curve and lower yields on reinvested cash and maturing assets. It noted that higher earning-asset balances had generally offset margin declines in net interest income.
- The company completed the sale of its property-and-casualty insurance agency on June 30 for an initial purchase price valued at $13.0m, with a potential earn-out of up to $1.0m; it recorded a $1.7m gain and removed $10.2m of related intangible assets.
- On October 15, First Bancorp completed its Select Bancorp acquisition, issuing 7.07m shares for approximately $325.8m in merger consideration. Select had $1.8bn in assets, $1.3bn in gross loans and $1.6bn in deposits. Purchase accounting fair-value measurements were not complete when the filing was issued.
- Management warned that assets above $10bn at December 31, 2021 could trigger additional regulation. It estimated a potential annual debit-card interchange fee impact of about $10m beginning July 1, 2022, partly offset by planned elimination of $1m–$1.5m in customer debit rewards, plus potential compliance costs.
- Credit-loss estimates rely on forecasts and significant judgment. Management used a more negative economic scenario in 2021 despite improving reported asset quality. The filing cautions that the pandemic’s effects may not yet be fully reflected in nonperforming-asset levels.
- No material pending legal proceedings or material changes to previously disclosed risk factors were reported, apart from the asset-threshold risk. The filing provides no specific earnings guidance.
Important facts for investors to verify
- Whether year-end assets exceeded $10bn and the resulting timing and actual cost of additional regulation, including debit interchange restrictions.
- Select Bancorp’s final purchase accounting, integration results, and contribution to earnings, capital and asset quality.
- Whether deposit growth persists and how deposit pricing, loan growth and reinvestment yields affect net interest margin.
- Credit trends, particularly commercial real estate and SBA exposures, and the sensitivity of the loan and unfunded-commitment allowances to forecasts and assumptions.
- The effect of securities valuation changes on accumulated other comprehensive income and reported capital.