First Bancorp — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022. First Bancorp is a North Carolina bank holding company operating First Bank, with 108 branches in North Carolina and South Carolina. At year-end, it reported $10.6 billion in assets, $6.7 billion in loans, $9.2 billion in deposits and $1.0 billion in shareholders’ equity.
Key financial results
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $324.9 million | $246.4 million |
| Net interest margin, tax-equivalent | 3.28% | 3.16% |
| Net income | $146.9 million | $95.6 million |
| Diluted earnings per share | $4.12 | $3.19 |
| Return on average assets | 1.39% | 1.13% |
| Return on average common equity | 13.40% | 9.86% |
| Total assets, year-end | $10.63 billion | $10.51 billion |
| Total loans, year-end | $6.67 billion | $6.08 billion |
| Total deposits, year-end | $9.23 billion | $9.12 billion |
| Total borrowings, year-end | $287.5 million | $67.4 million |
- Revenue and expenses: Net interest income rose 31.8%, reflecting higher average earning assets and rising rates. Noninterest income declined to $68.0 million from $73.6 million, principally due to lower mortgage and SBA-related revenue. Noninterest expense increased 5.7% to $195.2 million; higher personnel and operating costs associated with Select partly offset lower merger expenses.
- Credit and margins: Provision for loan losses was $12.6 million, versus $9.6 million. The allowance for credit losses was $91.0 million, or 1.36% of loans. Nonperforming assets fell to 0.36% of assets from 0.50%; net charge-offs were 0.01% of average loans.
- Cash flow: Operating activities provided $230.7 million; investing activities used $713.4 million; financing activities provided $291.9 million. Cash and cash equivalents declined $190.8 million to $270.3 million.
- Capital and liquidity: CET1 was 13.02% and total risk-based capital was 15.09%. The tangible common equity ratio declined to 6.39% from 8.38%, mainly due to securities-related accumulated other comprehensive losses. Liquid assets were 27.2% of deposits and borrowings. Available borrowing facilities included FHLB, correspondent-bank and Federal Reserve lines, subject to their terms and collateral.
Material changes versus 2021
- Loans increased $583.4 million, or 9.6%, through organic growth. Deposits increased 1.1%; retail customer deposits declined 1.7%, and brokered deposits rose to $261.9 million from $7.4 million.
- Borrowings increased $220.1 million, principally through short-term FHLB advances used to fund loan growth and deposit fluctuations.
- Higher market rates supported interest income but prompted deposit repricing and more use of higher-cost funding. The Bank became subject to the Durbin Amendment interchange-fee cap after exceeding $10 billion in assets, contributing to lower interchange income.
- Available-for-sale securities had $444.1 million of gross unrealized losses at year-end; held-to-maturity securities’ fair value was $109.2 million below carrying value. Management attributed the losses primarily to interest rates, not credit concerns, and said it did not expect to sell the securities before recovery.
- Shareholders’ equity declined to $1.03 billion from $1.23 billion, principally reflecting a $317.0 million after-tax reduction in accumulated other comprehensive income; net income partly offset the decline.
Outlook, risks and unusual items
- Outlook: Management gave no specific earnings or balance-sheet guidance. It expected an effective tax rate of approximately 21% in 2023 and stated its current intention to continue regular quarterly dividends, subject to regulatory and other constraints.
- GrandSouth acquisition: The all-stock acquisition closed January 1, 2023, after the reporting date. First Bancorp issued approximately 5.03 million shares; the acquired bank had approximately $1.2 billion in assets, $1.0 billion in loans and $1.1 billion in deposits. Purchase accounting was incomplete when the filing was prepared; goodwill and integration benefits remained uncertain.
- Economic and credit risks: Management cited inflation, recession risk, higher unemployment, lower GDP projections and possible declines in real-estate values. These factors could raise expected credit losses; the allowance depends on significant estimates and forecasts. Commercial real estate represented 53% of loans, and loans to lessors of nonresidential buildings were 23.4% of the portfolio.
- Interest-rate risk: Modeling projected 12-month net interest income down 1.4% under an immediate +400-basis-point shock and down 15.1% under a -400-basis-point shock. Management also described the economic value of equity as liability-sensitive in a rising-rate environment. Actual results may differ from model estimates.
- Other exposures: Uninsured deposits were approximately $3.5 billion. Off-balance-sheet commercial commitments totaled $2.38 billion, including $2.16 billion of lines and loan commitments; standby letters of credit were $20.2 million. The company reported no pending legal proceedings it considered material.
- Audit and controls: BDO issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter, reflecting the judgment involved in qualitative adjustments and economic forecasts.
Important facts for investors to verify
- Track deposit retention, deposit pricing, brokered-funding use and liquidity as rates and competition evolve; assess the concentration of uninsured deposits.
- Review credit trends, especially commercial real estate exposures, classified loans and changes in the allowance under updated economic forecasts.
- Monitor securities marks, AOCI and tangible common equity, alongside regulatory capital ratios, which are affected differently by the securities losses.
- Assess GrandSouth integration, realized synergies, acquisition costs, final purchase accounting and the impact of newly issued shares.
- Confirm the effect of continuing interchange-fee limits and weaker mortgage and SBA activity on recurring noninterest revenue.