First Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021, and income and cash-flow comparisons are with Q1 2021. First Bancorp is a North Carolina bank holding company. Comparisons are affected by its October 2021 acquisition of Select Bancorp, which added substantial assets, loans, deposits, and operating costs.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $10.652 billion | $10.509 billion at Dec. 31, 2021 |
| Net interest income | $76.9 million; tax-equivalent net interest margin 3.21% | $55.2 million; 3.27% in Q1 2021 |
| Net income | $34.0 million; diluted EPS $0.95 | $28.2 million; diluted EPS $0.99 in Q1 2021 |
| Noninterest income / expense | $19.3 million / $51.5 million | $20.7 million / $40.1 million in Q1 2021 |
| Loans, net of deferred fees | $6.065 billion; allowance for loan losses $82.1 million (1.35% of loans) | $6.082 billion; allowance $78.8 million at Dec. 31, 2021 |
| Deposits / borrowings | $9.385 billion / $67.4 million | $9.125 billion / $67.4 million at Dec. 31, 2021 |
| Cash and cash equivalents | $565.8 million | $461.2 million at Dec. 31, 2021 |
| Operating cash flow | $100.1 million | $30.7 million in Q1 2021 |
| Regulatory capital | CET1 12.85%; total risk-based capital 14.99%; Tier 1 leverage 9.60% | All above stated regulatory minimums |
Net interest income increased 39.2%, principally reflecting higher earning-asset balances from Select and organic growth, partly offset by lower net interest margin. Net income rose, but diluted EPS fell as the weighted-average share count increased following the acquisition. Loans declined 0.3% from year-end as PPP loan forgiveness more than offset first-quarter growth; deposits increased 2.9%. Cash from operations was supplemented by deposit growth, while investing activity used $249.0 million, largely reflecting securities purchases.
Material changes and notable items
- Available-for-sale securities had a $214.6 million pretax unrealized loss at quarter-end. The resulting after-tax other comprehensive loss for the quarter was $140.0 million, increasing accumulated other comprehensive loss to $165.0 million and contributing to a decline in total shareholders’ equity to $1.117 billion from $1.231 billion at year-end. Management attributed the securities losses primarily to rising interest rates, not credit concerns, and said it did not intend to sell and was not more likely than not to be required to sell before recovery.
- Q1 2022 included $3.5 million of merger and acquisition costs, primarily computer-system conversion costs related to Select. Noninterest expenses increased 28.5% year over year, also reflecting the larger post-acquisition business.
- Noninterest income declined 6.9% year over year. Lower mortgage banking, PPP-related SBA consulting, and insurance-related commissions more than offset growth in service charges and card interchange. Other gains included $1.6 million, primarily from BOLI death benefits.
- The company recorded a $3.5 million loan-loss provision and a $1.5 million reversal of provision for unfunded commitments, for a net $2.0 million credit-loss provision. No corresponding provision was recorded in Q1 2021.
- Nonperforming assets declined to $48.9 million from $52.6 million at year-end; nonperforming assets were 0.46% of total assets. Net charge-offs were $0.2 million, or 0.01% of average loans on an annualized basis.
Outlook, risks, and contingencies
- Management expected continued organic loan growth during the remainder of 2022. It anticipated substantially all remaining $1.3 million of deferred PPP loan fees would be recognized in Q2 2022 as loans were forgiven.
- Management described near-term net interest income as not likely to face significant pressure from rate changes and said rising rates could benefit margin if funding costs remain stable. It also cautioned that competition for quality loans and deployment of excess liquidity into lower-yielding assets could continue to pressure margin. The company reported $3.2 billion more interest-bearing liabilities than earning assets subject to rate changes within one year under its gap analysis, while noting that administered deposit rates may reprice with a lag.
- Liquid assets were 33.9% of deposits and borrowings. Unused available credit lines totaled approximately $1.1 billion; management considered liquidity adequate for foreseeable needs.
- Key risks include interest-rate and yield-curve movements, economic and pandemic-related uncertainty, credit-loss estimation, and real-estate concentration: approximately 89% of loans were secured by real estate. Management said all COVID-19 deferral loans had returned to regular payment schedules and it had not seen significant pandemic-related deterioration in portfolio quality.
- Because assets exceeded $10 billion at year-end 2021, debit-card interchange revenue was expected to be adversely affected by the Durbin Amendment beginning July 1, 2022. The company reported no material pending legal proceedings and no material change to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- How rising rates, deposit pricing, and the flat yield curve affect net interest margin and funding costs.
- Whether unrealized securities losses persist or create liquidity, capital, or sale-pressure concerns; management’s stated intent was to hold affected securities.
- Post-Select integration costs, expense trends, and whether acquisition-related growth translates into sustained per-share earnings growth.
- Loan growth, real-estate concentration, credit quality, and the adequacy of the loan and unfunded-commitment allowances as forecasts change.
- The expected effect of the Durbin Amendment on card revenue from July 2022 and the sustainability of noninterest income following lower mortgage and PPP activity.