First Bancorp — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. First Bancorp is a North Carolina bank holding company operating through First Bank. The October 2021 Select Bancorp acquisition materially affects comparisons with 2021. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $78.3 | $58.8 | $155.1 | $114.0 |
| Noninterest income | $17.3 | $21.4 | $36.5 | $42.0 |
| Net income | $36.6 | $29.3 | $70.6 | $57.5 |
| Diluted EPS | $1.03 | $1.03 | $1.98 | $2.02 |
| Net interest margin, tax-equivalent | 3.18% | 3.22% | 3.19% | 3.24% |
- Q2 net interest income rose 33.2% and net income rose 24.9% year over year, while diluted EPS was unchanged. For the first half, net interest income grew 36.1% and net income grew 22.7%, but diluted EPS declined from $2.02 to $1.98, reflecting the substantially higher average share count after the Select acquisition.
- Q2 noninterest income fell 19.2%; first-half noninterest income fell 13.1%. Mortgage banking, SBA consulting and loan-sale income, and insurance-related commissions were among the declines. Higher service charges and card revenue partially offset them.
- Q2 noninterest expense increased 20.5%; first-half expense increased 24.4%. First-half results included $4.2 million of merger and acquisition expenses, primarily Select system-conversion costs. The filing attributes broader expense growth to the acquired operations, staffing, and related activity.
- Provision for credit losses was zero in Q2 and $3.5 million for the first half; a $1.5 million first-half reversal for unfunded commitments partly offset that provision. The comparable 2021 periods had no loan-loss provision and a $1.9 million provision for unfunded commitments.
Financial position, cash flow, and capital
- At June 30, total assets were $10.57 billion, loans $6.24 billion, deposits $9.36 billion, and shareholders’ equity $1.06 billion. Since December 31, 2021, loans increased 2.7% and deposits increased 2.6%; management cited organic loan growth and deposit initiatives.
- Cash and cash equivalents were $434.1 million, down $27.1 million from year-end. First-half operating cash flow was $130.5 million; investing cash outflow was $377.5 million and financing cash inflow was $219.9 million.
- Reported borrowings were $67.4 million. The company reported $1.2 billion of unused and available credit lines and a 30.5% ratio of liquid assets (cash and securities) to deposits and borrowings, which management considered adequate for foreseeable needs.
- Regulatory capital remained above stated minimums: common equity Tier 1 12.90%, Tier 1 risk-based 13.76%, total risk-based 15.01%, and Tier 1 leverage 9.95% at June 30.
- Net interest margin was lower year over year. Management cited lower yields on earning assets and a shift toward lower-yielding securities, partly offset by higher asset volumes and lower deposit costs. Rising market rates also drove significant unrealized securities losses: accumulated other comprehensive loss widened to $249.4 million from $25.0 million at year-end. Management said the losses were primarily interest-rate-related, did not intend to sell the securities, and did not expect to be required to sell them before recovery.
Credit quality, outlook, and risks
- Asset-quality measures improved from year-end: nonperforming assets declined to $41.1 million from $52.6 million; nonaccrual loans were $28.7 million; and the allowance for credit losses was $82.2 million, or 1.32% of loans. Net charge-offs were $0.1 million for the first half. Management considers the allowance adequate but cautions that estimates depend on uncertain economic and borrower conditions.
- Approximately 89% of loans were secured by real estate, concentrating credit exposure in real-estate values and the company’s operating markets. The filing also identifies interest-rate changes, competition for quality loans and deposits, inflation-driven costs, and ongoing COVID-19 uncertainty as risks.
- The company said short-term rate increases may benefit margin if funding costs remain stable, but warned of pressure from competition and the securities-heavy earning-asset mix. Its gap analysis showed about $3.2 billion more interest-bearing liabilities than earning assets repricing within one year; management noted that deposit pricing behavior and other model limitations complicate this measure.
- No earnings or financial guidance was provided. The filing reports a June 2022 merger agreement with GrandSouth Bancorporation; the supplied text does not provide transaction terms or an expected closing date. Management reported no material legal proceedings and no material changes to the previously disclosed risk factors.
Investor facts to verify
- How the GrandSouth transaction is expected to affect capital, integration costs, and future earnings.
- Whether deposit costs rise as market rates increase, and the resulting effect on net interest margin.
- How securities unrealized losses, liquidity needs, and capital measures evolve if rates or deposit flows change.
- Whether loan growth, real-estate collateral values, nonperforming assets, and credit-loss provisions continue to support current asset-quality trends.
- How the Durbin Amendment’s debit interchange fee limits, effective for the bank beginning July 1, 2022, affect card revenue.