First Bancorp (FBNC) — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. First Bancorp is a North Carolina-based bank holding company operating First Bank, with 101 branches in North Carolina and South Carolina. The filing was signed February 26, 2021.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $218.1 million | $216.2 million |
| Provision for loan losses | $35.0 million | $2.3 million |
| Noninterest income | $81.3 million | $59.5 million |
| Noninterest expense | $161.3 million | $157.2 million |
| Net income | $81.5 million | $92.0 million |
| Diluted earnings per share | $2.81 | $3.10 |
| Return on average assets / common equity | 1.20% / 9.32% | 1.53% / 11.32% |
| Tax-equivalent net interest margin | 3.56% | 4.00% |
At year-end, assets were $7.29 billion, loans $4.73 billion, deposits $6.27 billion, and shareholders’ equity $893.4 million. The allowance for loan losses was $52.4 million, or 1.11% of loans, versus $21.4 million, or 0.48%, a year earlier. Nonperforming assets were $47.0 million, 0.64% of assets; nonaccrual loans rose to $35.1 million from $24.9 million.
Operating cash flow was $57.1 million; investing cash flow was negative $960.3 million and financing cash flow was positive $1.04 billion. Cash and cash equivalents increased $136.0 million to $367.3 million. Borrowings declined to $61.8 million from $300.7 million. Liquid assets (cash and securities) equaled 31.4% of deposits and borrowings, compared with 21.4% in 2019. Regulatory capital remained above minimums: CET1 was 13.19%, total risk-based capital 15.37%, and Tier 1 leverage 9.88%.
Material changes and notable items
- Net income fell 11.5% and diluted EPS fell 9.4%, principally reflecting the sharply higher credit-loss provision related to COVID-19.
- Net interest margin declined 44 basis points as lower rates and substantial low-yielding excess liquidity offset growth in earning assets. Net interest income increased only 0.9%.
- Noninterest income rose 36.6%, supported by higher mortgage origination fees, $8.0 million in securities gains, and increased SBA consulting fees associated with PPP activity. Mortgage fees rose to $14.2 million from $3.9 million.
- Deposits grew 27.2%, including strong growth in transaction accounts. Loans grew 6.2%, including $240.9 million in PPP loans outstanding at year-end. Management attributed unusually high deposits partly to stimulus funds, changed customer behavior, and a shift toward FDIC-insured banks.
- The company sold about $220 million of securities, recognizing $8.0 million in gains, and purchased securities as deposits exceeded loan growth. It paid down borrowings by $239 million.
- First Bancorp acquired Magnolia Financial on September 1, 2020 for approximately $10.0 million, adding a southeastern U.S. business-financing operation.
- The company repurchased 1.12 million shares for $31.9 million and declared $0.72 per share in dividends. A new $20 million repurchase authorization was announced in January 2021.
Outlook, risks, and contingencies
Management described the 2021 outlook as uncertain and expected pandemic-related economic effects to persist at least through the first half of 2021. If conditions improve, it expects traditional loan demand to rise and deposits to normalize; loan growth may be substantially offset by forgiveness of year-end PPP balances. Management expects very low interest rates and continued net interest margin pressure, with limited capacity to reduce already-low funding costs.
- Management expected to adopt CECL on January 1, 2021, with an estimated $12–14 million increase in the allowance for credit losses and a $6–7 million increase in reserves for unfunded commitments. These were estimates, not reported adoption results.
- COVID-19 remains a material uncertainty for borrower repayment, credit quality, customer behavior, staffing, and operations. Payment deferrals had fallen from $774 million in June to $16.6 million at year-end, but management cautioned that relief programs may have masked underlying stress.
- Management identified approximately $15–20 million of performing loans with potential to develop problems. Hotel loans totaled about $175 million and restaurant loans about $82 million; these sectors were among those considered most exposed.
- Other significant risks include interest-rate and margin sensitivity, commercial real estate and local-market exposure, cybersecurity and vendor disruptions, regulatory requirements, and the transition away from LIBOR. The filing states no pending legal proceeding was considered material.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for loan losses, particularly COVID-related qualitative assumptions, was identified as a critical audit matter.
Important facts for investors to verify
- How CECL adoption compared with management’s estimated reserve increases, and how subsequent credit provisions and charge-offs evolved.
- Whether nonaccrual loans, potential problem loans, and exposure to hotels, restaurants, and other affected borrowers increased after year-end.
- How quickly PPP loans were forgiven and deferred fees recognized, and whether normalized lending replaced PPP balances.
- Whether deposit levels, liquidity, and net interest margin changed as pandemic-related cash balances and low rates affected the balance sheet.
- That dividend and repurchase plans remained consistent with regulatory capital, liquidity, and the company’s operating outlook.