First Bancorp — Q1 2023 Form 10-Q
Business context and reporting period: First Bancorp reported unaudited consolidated results for the three months ended March 31, 2023. The quarter includes GrandSouth Bancorporation from its January 1 acquisition date. The all-stock acquisition expanded First Bancorp’s South Carolina presence by eight branches.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $92.5 million | $76.9 million in Q1 2022; up 20.3% |
| Net interest margin | 3.31% tax-equivalent | 3.21% in Q1 2022 |
| Net income; diluted EPS | $15.2 million; $0.37 | $34.0 million; $0.95 in Q1 2022 |
| Noninterest income | $13.5 million | $19.3 million in Q1 2022 |
| Noninterest expense | $74.2 million | $51.5 million in Q1 2022 |
| Operating cash flow | $36.6 million | $100.1 million in Q1 2022 |
| Total assets | $12.36 billion | $10.63 billion at December 31, 2022 |
| Total loans / allowance for loan losses | $7.80 billion / $106.4 million | $6.67 billion / $91.0 million at year-end |
| Total deposits | $10.37 billion | $9.23 billion at year-end |
| Borrowings | $606.5 million | $287.5 million at year-end |
| Shareholders’ equity | $1.30 billion | $1.03 billion at year-end |
Cash and cash equivalents were $713.4 million, versus $270.3 million at year-end. The quarter’s $443.1 million increase reflected financing and investing cash flows, including deposit growth, short-term borrowing and acquisition-related activity; operating cash flow was $36.6 million.
At March 31, the liquidity ratio was 26.2%, or 30.5% including $786.4 million of available borrowing lines. Regulatory capital ratios were 12.53% CET1, 13.32% Tier 1, 14.88% total risk-based capital and 10.28% leverage. Tangible common equity to tangible assets was 6.60%, including AOCI.
Material changes and notable items
- GrandSouth acquisition: Added approximately $1.02 billion of loans and $1.05 billion of deposits. First Bancorp issued 5.03 million shares; consideration was approximately $229.5 million. The company recorded $114.5 million of goodwill and $28.8 million of core deposit intangibles.
- Earnings decline: Net income fell 55.4% year over year. Management cited $12.2 million of merger costs and a $12.2 million initial provision for acquired non-credit-deteriorated loans. The reported loan-loss provision was $11.5 million; total provision including unfunded commitments was $12.5 million.
- Revenue mix: Net interest income rose with acquired and organic earning-asset growth and a higher margin. Noninterest income fell 29.7%, principally because SBA loan-sale gains declined to $0.3 million from $3.3 million, and mortgage fees and other gains were lower. Bankcard interchange income also declined following the Durbin Amendment’s application to the company.
- Expenses: Noninterest expense rose 44.1%, including higher acquisition-related costs, personnel expense, intangible amortization and integration expenses. A $2.4 million estimated pension-plan termination charge was recorded; management expects to terminate the plan during 2023, with termination anticipated in the fourth quarter.
- Credit quality: Nonperforming assets were $31.1 million, or 0.25% of assets, compared with $38.3 million, or 0.36%, at year-end. Classified loans increased 5.3% to $51.1 million and special-mention loans increased 15.3% to $44.9 million, with much of the increase attributed to acquired commercial real estate loans. Approximately 90% of loans are secured by real estate.
- Securities and accumulated losses: Available-for-sale securities had $408.7 million of gross unrealized losses; held-to-maturity securities had $90.9 million. AOCI improved by $27.9 million during the quarter but remained a loss of $314.0 million. Management attributed losses primarily to interest rates, said it did not intend to sell the securities, and considered forced sale before recovery unlikely.
Outlook, risks and contingencies
The filing provides no formal earnings or financial guidance. Management said it expects interest rates may continue rising in 2023 at a slower pace, while also noting possible rate reductions later in 2023 or in 2024. Its models suggest near-term net interest income could be essentially flat or decline in either rising- or falling-rate scenarios; a flat or inverted yield curve and deposit competition may pressure margins. Results depend on uncertain model assumptions and actual outcomes may differ.
Management described liquidity as adequate for foreseeable operating needs. Available capacity included an approximately $862.1 million FHLB line, $265.0 million of correspondent-bank lines and a $166.2 million Federal Reserve discount-window line; $506.8 million was outstanding under the FHLB line. The company also identified about $980 million of commercial real estate loans eligible as additional FHLB collateral.
Key risks include credit losses and changing economic forecasts, real estate values, funding costs and interest-rate sensitivity, acquisition integration and realization of expected synergies, and fair-value estimates for acquired assets and liabilities. Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. It said no significant change had occurred in internal control over financial reporting.
Important facts for investors to verify
- How much of the quarter’s net interest income and loan growth is attributable to GrandSouth, and how acquisition-related accretion may change over time.
- Whether merger, integration and pension termination costs recur, and whether anticipated acquisition synergies are achieved.
- Deposit pricing, deposit mix and reliance on short-term borrowings as funding costs evolve.
- Trends in classified and special-mention loans, nonaccrual exposures, acquired commercial real estate credits and the adequacy of credit-loss allowances.
- The liquidity and capital impact of any deposit outflows, securities sales or further deterioration in the value of securities and real estate collateral.