FIRST BANCORP quarterly report, Q1 FY2024

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First Bancorp — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024. First Bancorp is a North Carolina bank holding company; its subsidiary First Bank conducts banking operations. Comparisons with Q1 2023 are affected by the January 2023 GrandSouth acquisition.

Financial performance and position

  • Profit: Net income was $25.3 million, or $0.61 diluted EPS, versus $15.2 million, or $0.37, in Q1 2023. The prior-year quarter included $12.2 million of GrandSouth merger costs and a $12.2 million initial provision for acquired credit losses.
  • Net interest income and margin: Net interest income declined 14.3% to $79.2 million. Reported net interest margin fell to 2.77% from 3.28%; tax-equivalent NIM declined to 2.80% from 3.31%. Higher deposit funding costs and lower loan discount accretion pressured results, partly offset by higher yields on earning assets.
  • Other income and expenses: Noninterest income was $12.9 million, down 4.4%, including a $975,000 loss on a security call. Noninterest expense fell 20.2% to $59.2 million, mainly because Q1 2023 included merger costs and overlapping personnel costs. The effective tax rate was 20.5%, versus 21.6%.
  • Balance sheet: Total assets were $12.1 billion, down 0.2% from year-end 2023. Loans were $8.08 billion, down $73.6 million; deposits were $10.30 billion, up $271.7 million, including a $183.5 million increase in brokered deposits. Cash and cash equivalents totaled $353.8 million.
  • Credit and securities: The allowance for loan losses was $110.1 million, or 1.36% of loans. Nonperforming assets were $47.5 million, 0.39% of total assets, up from $44.8 million at year-end. Available-for-sale securities had $418.9 million of gross unrealized losses; management attributed these primarily to interest rates, not credit concerns. Held-to-maturity securities had fair value $89.0 million below carrying value.
  • Cash flow: Operating activities used $20.1 million, compared with $36.6 million provided in Q1 2023. Investing activities provided $171.1 million, and financing activities used $35.0 million. Cash increased $116.0 million during the quarter.
  • Debt, liquidity, and capital: Borrowings were $332.3 million, down from $630.2 million at year-end. The on-balance-sheet liquidity ratio was 15.5%; total liquidity, including $2.3 billion of available borrowing capacity, was 31.4%. The company reported a 13.50% common equity Tier 1 ratio, 15.85% total risk-based capital ratio, and 7.48% tangible common equity ratio.

Material changes and management commentary

  • Management said higher funding costs—especially a 114-basis-point increase in the average cost of interest-bearing deposits—more than offset higher earning-asset yields. It expects continued sensitivity to interest rates and noted that its balance sheet is currently liability-sensitive.
  • Management attributed the Q1 2024 credit provision partly to slower loan prepayment assumptions and forecasts indicating continued commercial real estate index deterioration and economic uncertainty. The provision was $1.2 million versus $12.5 million in Q1 2023, when the acquisition-related initial provision was recorded.
  • Nonaccrual loans rose $3.4 million, primarily due to an SBA loan relationship substantially covered by an SBA guarantee. Total special-mention loans increased 27.7% from year-end, to $56.3 million. Approximately 88% of loans are secured by real estate.
  • Brokered deposits increased to $196.1 million from $12.6 million at year-end. The Federal Reserve ended the Bank Term Funding Program on March 11, 2024; First Bancorp had $231.0 million outstanding under it at quarter-end, due in December 2024.
  • In April 2024, after quarter-end, the company sold its Visa Class B shares and recognized a $4.5 million gain.
  • The company disclosed a material weakness in internal control over financial reporting related to application user access and segregation of duties. Remediation actions are underway, but management said the weakness is not fully remediated. Management performed additional procedures and concluded the Q1 financial statements were fairly presented.
  • The filing provides no specific earnings or financial guidance. Management cautions that actual results may differ from forward-looking statements due to interest rates, economic conditions, customer strategies, acquisitions, and regulatory actions. It reported no material change in risk factors from the 2023 Form 10-K and no legal proceedings it believes are material.

Investor verification priorities

  1. Track deposit pricing, deposit mix, brokered-deposit growth, and the effect of funding costs on NIM and earnings.
  2. Review the December 2024 repayment or refinancing plan for the $231.0 million BTFP borrowing and confirm available alternative liquidity.
  3. Monitor nonperforming and special-mention loans, commercial real estate exposures, SBA guarantees, and whether reserve levels keep pace with credit trends.
  4. Assess the duration and potential capital or liquidity implications of unrealized securities losses, while distinguishing rate-related marks from credit losses.
  5. Follow testing and remediation of the disclosed material weakness in financial-reporting controls.