First Bancorp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. First Bancorp is a North Carolina bank holding company. Results include GrandSouth Bancorporation from its acquisition date, January 1, 2023; therefore, comparisons with 2022 are affected by the acquisition.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $84.7 million | $85.3 million | $264.2 million | $240.5 million |
| Tax-equivalent net interest margin | 2.97% | 3.40% | 3.12% | 3.27% |
| Provision for credit losses | $0.0 million | $5.4 million | $14.9 million | $7.4 million |
| Noninterest income | $15.2 million | $16.9 million | $42.9 million | $53.4 million |
| Noninterest expense | $62.2 million | $48.7 million | $198.0 million | $149.6 million |
| Net income | $29.9 million | $37.9 million | $74.5 million | $108.5 million |
| Diluted EPS | $0.73 | $1.06 | $1.81 | $3.04 |
- Balance sheet at September 30: Assets were $12.0 billion, loans $8.0 billion, deposits $10.2 billion, borrowings $401.8 million, and shareholders’ equity $1.26 billion. Assets rose 12.7% from year-end 2022, primarily due to GrandSouth.
- Cash flow, first nine months: Operating activities provided $85.8 million; investing activities used $95.0 million; financing activities provided $12.5 million. Cash and cash equivalents ended at $273.6 million, up $3.3 million from year-end.
- Liquidity and capital: On-balance-sheet liquidity ratio was 14.4%; including $2.2 billion of available borrowing capacity, total liquidity ratio was 30.2%. Common equity Tier 1 ratio was 12.93%, total risk-based capital ratio 15.26%, and Tier 1 leverage ratio 10.72%.
- Credit measures: Allowance for credit losses on loans was $108.2 million, or 1.35% of loans. Nonperforming assets were $38.8 million, 0.32% of assets; net charge-offs were $4.7 million year to date.
Material changes and drivers
- Q3 net income declined 21% year over year. Management attributed lower earnings primarily to sharply higher funding costs: deposit interest expense increased $30.8 million and borrowing interest expense increased $5.4 million from Q3 2022. Higher earning assets, including acquired and organically grown loans, partly offset the pressure.
- Year-to-date net interest income increased 9.9%, but tax-equivalent margin fell 15 basis points to 3.12%, as higher deposit and borrowing costs more than offset improved loan yields and accretion.
- Noninterest income fell 19.6% year to date, mainly reflecting lower bankcard interchange revenue, SBA loan sale gains, and other gains. Noninterest expense rose 32.4%, reflecting GrandSouth-related staffing and operating costs, $13.5 million of merger expenses, and higher intangible amortization. The quarter included no merger expense.
- GrandSouth added approximately $1.02 billion of loans, $1.05 billion of deposits, and eight South Carolina branches. The transaction generated $114.5 million of goodwill; acquisition-related costs were $13.5 million for the first nine months.
- Available-for-sale securities had $521.7 million of unrealized losses at quarter-end, up $77.6 million from year-end. Management attributed the losses primarily to interest rates, stated it did not intend to sell the securities, and considered a forced sale before recovery unlikely.
Outlook, risks and unusual items
- The filing gives no specific earnings or financial guidance. Management said rates could rise moderately in the remainder of 2023, with rates potentially stabilizing and possible Federal Reserve reductions in 2024. Its models indicate near-term net interest income could decline in both rising- and falling-rate scenarios; actual outcomes may differ from modeled results.
- Key sensitivities include deposit pricing and competition, the cost and availability of wholesale funding, interest-rate curve changes, loan prepayment assumptions, and credit performance. Approximately 88% of loans are secured by real estate. Non-owner-occupied commercial office loans represent about 5.8% of the portfolio.
- Management considers the allowance adequate, but notes that economic deterioration, unemployment, or declines in collateral values could require additional provisions. Classified loans increased to $51.4 million from $48.5 million at year-end; special-mention loans declined to $36.8 million from $39.0 million.
- The company recorded a $2.4 million estimated pension termination charge in Q1 and amended the plan to terminate effective July 31, 2023, with liquidation anticipated in Q4. Management did not expect material additional merger charges.
- The company reported no material pending legal proceedings, no material changes to its stated risk factors, and effective disclosure controls. It reported adopting a required executive compensation clawback policy after quarter-end.
Important facts for investors to verify
- Whether deposit costs and borrowing reliance continue to pressure net interest margin and earnings.
- GrandSouth integration progress, remaining costs, expected synergies, and acquired-loan performance and discount accretion.
- Developments in criticized and nonperforming loans, especially commercial real estate, and the adequacy of loan and unfunded-commitment reserves.
- Available liquidity and the potential effects of securities unrealized losses, collateral pledging, or funding-market changes.
- Completion and final cost of the pension plan termination, and any subsequent material developments.