First Bancorp — Q2 2020 Form 10-Q
Business context and period. First Bancorp is a North Carolina-based bank holding company. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are to the corresponding 2019 periods unless noted. Amounts are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2020 | Six months 2020 | Comparison |
|---|---|---|---|
| Net interest income | $52.6 million | $107.4 million | Down 3.3% and 0.4%, respectively |
| Net interest margin, tax-equivalent | 3.49% | 3.71% | 4.06% in both comparable 2019 periods |
| Provision for loan losses | $19.3 million | $24.9 million | 2019: benefit of $0.3 million and provision of $0.2 million |
| Noninterest income | $26.2 million | $39.9 million | Up from $15.6 million and $29.7 million |
| Noninterest expense | $38.9 million | $79.0 million | Down 3.0% and up 0.2% |
| Net income / diluted EPS | $16.4 million / $0.56 | $34.5 million / $1.18 | 2019: $23.9 million / $0.80 and $46.1 million / $1.55 |
Q2 noninterest income included an $8.0 million gain on securities sales, increased mortgage fees and PPP-related SBA consulting fees. These items helped offset lower net interest income and the sharply higher credit-loss provision. The filing attributes weaker earnings primarily to estimated COVID-19-related loan losses and margin compression following interest-rate cuts.
- Balance sheet: Total assets were $6.89 billion at June 30, up 12.1% from year-end 2019. Loans were $4.77 billion, up 7.1%; excluding $244.9 million of PPP loans, loan growth was $71.7 million, or 3.2% annualized.
- Deposits and liquidity: Deposits rose 18.2% to $5.83 billion, with growth concentrated in transaction accounts. Cash and cash equivalents increased to $679.5 million from $231.3 million. Liquid assets were 26.2% of deposits and borrowings, versus 21.4% at year-end. Management considered liquidity adequate; unused available credit lines totaled about $1.0 billion.
- Debt and capital: Borrowings declined to $112.2 million from $300.7 million at year-end. The total risk-based capital ratio was 15.13%, versus 14.89%; the Tier 1 leverage ratio was 10.29%, versus 11.19%. The company reported capital above regulatory minimums.
- Credit quality: The allowance for loan losses was $42.3 million, or 0.89% of loans, compared with $21.4 million and 0.48% at year-end. Nonperforming assets were $47.8 million, or 0.69% of assets, versus $37.8 million and 0.62%. Six-month net charge-offs were $3.9 million, or 0.17% of average loans annualized.
- Cash flow: For the first six months, operating cash flow was $44.5 million, investing cash outflow was $274.6 million, and financing cash inflow was $678.3 million. The resulting increase in cash and cash equivalents was $448.2 million, driven principally by deposit growth.
Material changes, outlook and risks
- First Bancorp had processed deferrals on 1,483 loans totaling $774 million, about 16.2% of the loan portfolio. Initial deferrals were generally up to 90 days; some borrowers received second deferrals. The company continued to accrue interest and, under applicable relief provisions, these modifications were generally excluded from TDR classification.
- Management included approximately $16.7 million of COVID-related qualitative reserves in the allowance. It cautioned that deferrals and government support may mask future credit deterioration, and that unemployment and business closures could increase nonperforming assets and losses.
- The company elected to defer CECL adoption under the CARES Act. It estimated that initial adoption would raise the allowance for credit losses to approximately $40–$44 million as of January 1, 2020, with the initial effect recorded through retained earnings.
- Management expected continued net interest margin pressure from low rates and repricing of loans and investments, but anticipated less downward pressure than in Q2. It expected loan growth to continue, likely at lower-than-normal levels due to the pandemic. No numerical earnings guidance was provided.
- COVID-19, local economic conditions, interest rates, borrower repayment capacity, loan-deferral outcomes and uncertain PPP forgiveness timing are key risks. Management reported no goodwill impairment at June 30 despite an interim review; further economic changes could prompt reassessment.
- Other notable items: the company sold about $220 million of securities for an $8.0 million gain; repurchased 680,695 shares for $22.4 million during the six months, with $17.6 million of authorization remaining; and declared a $0.18 per-share quarterly dividend.
Investor facts to verify
- How the $774 million of deferred loans performed after initial and second deferral periods, particularly in commercial real estate and other heavily deferred categories.
- Whether the $42.3 million allowance adequately reflects pandemic losses, and the eventual size and timing of CECL adoption adjustments.
- Whether elevated deposits and cash balances persist, and how deposit mix and loan growth affect net interest margin and earnings.
- How much of PPP-related fee income is recognized, deferred or accelerated as loans are forgiven or repaid, and whether SBA consulting and mortgage activity normalize.
- Whether nonperforming loans and charge-offs continue to rise, including the commercial loans placed on nonaccrual during Q2.