First Bancorp — Q3 2022 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. First Bancorp is a North Carolina bank holding company whose principal subsidiary is First Bank. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net income | $37.9 million; diluted EPS $1.06 | Q3 2021: $27.6 million; $0.97 diluted EPS |
| Net interest income | $85.3 million | Up 45.7% from $58.6 million in Q3 2021 |
| Net interest margin | 3.40% tax-equivalent | 3.03% tax-equivalent in Q3 2021 |
| Noninterest income | $16.9 million | Up 2.4% from $16.5 million in Q3 2021 |
| Noninterest expense | $48.7 million | Up 19.3% from $40.8 million in Q3 2021 |
| Total assets | $10.52 billion | Nearly unchanged from $10.51 billion at December 31, 2021 |
| Loans | $6.53 billion | Up $443.6 million, or 7.3%, from year-end 2021 |
| Deposits | $9.23 billion | Up $104.6 million, or 1.1%, since year-end; down $130.5 million during Q3 |
| Borrowings | $226.5 million | Up from $67.4 million at December 31, 2021 |
| Shareholders’ equity | $984.5 million | Down from $1.23 billion at year-end, principally reflecting securities-related OCI losses |
For the first nine months, net income was $108.5 million ($3.04 diluted EPS), versus $85.1 million ($2.99 diluted EPS) in 2021. Net interest income rose 39.4% to $240.5 million; tax-equivalent NIM was 3.27%, versus 3.17%. Noninterest income declined 8.8% to $53.4 million, while noninterest expense increased 22.7% to $149.6 million. The comparison is affected by the October 2021 Select Bancorp acquisition.
Cash flow and liquidity: Nine-month operating cash flow was $179.2 million. Investing activities used $611.5 million, including a $422.7 million net increase in loans; financing activities provided $240.7 million, including deposit growth and $159.0 million in short-term borrowings. Cash and cash equivalents declined $191.6 million to $269.5 million. Management reported $1.1 billion of unused available credit lines and liquid assets equal to 26.7% of unpledged deposits and borrowings, and considered liquidity adequate for foreseeable needs.
Credit and capital: The allowance for credit losses on loans was $86.6 million, or 1.33% of loans, compared with $78.8 million and 1.30% at year-end. Q3 provision for credit losses was $5.4 million, versus a $0.4 million net reversal in Q3 2021; nine-month provision was $7.4 million, versus $1.6 million in 2021. Nonperforming assets decreased to $40.7 million from $52.6 million at year-end; nonperforming loans were 0.61% of loans. Regulatory capital ratios at September 30 included 12.76% common equity Tier 1, 13.59% Tier 1, 14.84% total risk-based capital, and a 10.21% Tier 1 leverage ratio.
Material changes and unusual items
- Higher rates and earning-asset growth, including the Select acquisition, drove higher net interest income and margin. Management noted that loan yields rose while deposit costs remained low during the quarter.
- Available-for-sale securities had $464.6 million of gross unrealized losses at September 30, primarily attributed to interest-rate movements rather than credit concerns. The net-of-tax accumulated other comprehensive loss was $358.0 million, versus $25.0 million at year-end. The company said it did not intend to sell the securities and did not expect to be required to sell them before recovery of amortized cost.
- Mortgage banking fees fell substantially as higher market rates reduced refinancing and origination activity. SBA consulting and loan-sale revenues also declined, in part as the PPP program wound down. The nine-month comparison additionally reflects the 2021 sale of most of the insurance subsidiary’s assets.
- Q3 other gains included a $2.7 million settlement relating to prior-year cash-letter processing differences. Nine-month other gains of $6.0 million also included BOLI death benefits. Nine-month merger and acquisition expense was $4.8 million, primarily Select system-conversion costs.
- The Durbin Amendment interchange-fee limitation took effect for the company on July 1, 2022 after it exceeded $10 billion in assets at December 31, 2021.
- GrandSouth Bancorporation acquisition: all regulatory approvals had been received, shareholder approval remained pending, and closing was expected in early January 2023. The announced all-stock exchange ratio was 0.91 First Bancorp shares per GrandSouth share.
Outlook, risks and contingencies
No specific earnings or financial guidance is provided in the filing. Management said it may benefit from further short-term rate increases if funding costs remain stable, but cautioned that deposit competition, loan pricing competition, and low-yielding investment securities may pressure margins. The company described a flat or inverted longer-term yield curve as unfavorable. Its gap analysis showed approximately $3.5 billion more interest-bearing liabilities than earning assets repricing within one year, while management’s discussion of deposit repricing and asset sensitivity indicated potential near-term benefit from rising rates; actual results depend on repricing behavior and customer deposit pricing.
Management identified uncertainty in economic forecasts, including higher unemployment and weaker commercial real estate index assumptions, as factors increasing CECL loss estimates. Approximately 90% of loans are secured by real estate, exposing the portfolio to property-value and local economic changes. Other risks include acquisition integration, competitive deposit pricing, interest-rate movements, and general economic and regulatory conditions. The filing reports no material pending legal proceeding, no material change to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit trends and funding costs stabilize, and how they affect net interest margin and borrowing needs.
- Whether the large unrealized securities losses remain temporary and whether any liquidity needs could require securities sales.
- Loan growth, commercial real estate and other real-estate-linked exposure, CECL assumptions, and subsequent credit-quality trends.
- GrandSouth shareholder approval, transaction timing, integration costs, and expected effects on capital and earnings.
- How the interchange-fee limitation and continued weakness in mortgage and SBA-related activity affect noninterest revenue.
- Whether the Q3 settlement gain and other nonrecurring gains affect comparisons with future periods.