First Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. First Bancorp is a bank holding company operating through First Bank. Comparisons are materially affected by the January 1, 2023 all-stock acquisition of GrandSouth Bancorporation; its results are included from the acquisition date.
Financial results and condition
- Q2 earnings: Net income was $29.4 million, or $0.71 diluted EPS, versus $36.6 million, or $1.03, in Q2 2022. For the first half, net income was $44.6 million, or $1.08 diluted EPS, versus $70.6 million, or $1.98.
- Interest income and margin: Q2 net interest income rose 11.1% to $87.0 million; first-half net interest income rose 15.7% to $179.5 million. Tax-equivalent net interest margin was 3.08% in Q2, down from 3.18%; first-half margin was 3.19%, unchanged year over year. Management attributed margin pressure to higher funding costs.
- Other income and expenses: Noninterest income declined 17.5% in Q2 to $14.2 million and 23.9% in the first half to $27.8 million, including lower bankcard interchange revenue and SBA loan-sale gains. Noninterest expense increased 24.7% in Q2 to $61.6 million and 34.6% in the first half to $135.8 million, reflecting acquisition-related operating costs, personnel expense, amortization and merger costs.
- Credit costs: Q2 provision for credit losses was $2.4 million net of a $1.3 million reversal for unfunded commitments. First-half total provision was $14.9 million, including a $12.2 million initial provision on acquired non-credit-deteriorated loans and a $1.9 million initial provision for acquired unfunded commitments.
- Balance sheet: At June 30, total assets were $12.0 billion, loans were $7.9 billion and deposits were $10.2 billion. The acquisition added approximately $1.02 billion in loans and $1.05 billion in deposits. Management reported $212.4 million of organic loan growth and $154.0 million of organic market deposit growth since year-end, excluding wholesale funding.
- Funding, liquidity and capital: Borrowings were $481.7 million, up from $287.5 million at December 31, 2022. The on-balance-sheet liquidity ratio was 17.3%; management reported total liquidity of 29.0% including available credit lines. Regulatory capital ratios included 12.75% common equity Tier 1, 15.09% total risk-based capital and 10.47% Tier 1 leverage.
- Cash flow: Operating activities provided $65.2 million in the first half, compared with $130.5 million in 2022. Cash and cash equivalents increased $90.4 million to $360.7 million. Investing activities used $10.2 million and financing activities provided $35.4 million.
Material changes and notable items
- GrandSouth’s acquisition added eight South Carolina branches and $114.5 million of goodwill; First Bancorp issued approximately 5.03 million common shares. Acquisition-related merger costs were $13.5 million in the first half, including $1.3 million in Q2.
- Deposit interest expense rose to $27.3 million in Q2 from $1.6 million a year earlier; borrowing interest expense rose to $6.8 million from $0.6 million. Management cited higher market rates, deposit competition and increased short-term borrowing needs.
- Available-for-sale securities had $440.1 million of gross unrealized losses at June 30; accumulated other comprehensive loss was $338.1 million. Management attributed losses primarily to interest rates, stated it did not intend to sell the securities, and considered it more likely than not it would not be required to sell before recovery.
- Nonperforming assets were $35.8 million, or 0.30% of assets. Nonaccrual loans were $29.9 million; classified loans increased to $55.4 million from $48.3 million at year-end. The filing notes that adoption of a new loan-modification accounting standard affects comparability of certain nonperforming-loan categories.
- The company recorded a $2.4 million estimated pension-plan termination cost and expected to terminate the plan in Q4 2023. Increased check fraud also contributed to higher non-credit losses.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management said rates might rise moderately in 2023, with stabilization or possible Federal Reserve rate reductions in 2024, while emphasizing uncertainty. Interest-rate modeling indicated short-term net interest income could be essentially flat or decline in rising- or falling-rate scenarios; management described the company as liability-sensitive in a rising-rate environment. Results depend on deposit pricing, loan repricing, economic conditions and management assumptions.
Principal risks discussed include credit deterioration—particularly changing commercial real estate conditions—deposit competition and funding costs, interest-rate sensitivity, securities valuation, acquisition integration and the judgment involved in estimating credit-loss allowances. Approximately 88% of loans are secured by real estate. Management reported available borrowing capacity of about $1.6 billion and said liquidity was adequate for foreseeable needs. No material pending legal proceedings or material changes to the prior annual report’s risk factors were reported. Disclosure controls were concluded to be effective.
Investor verification priorities
- Review the contribution and integration progress of GrandSouth, including acquisition costs, expected synergies and realized organic growth.
- Track deposit costs, deposit mix, borrowings and available liquidity as interest rates and competition evolve.
- Monitor commercial real estate and other credit indicators, including classified loans, nonaccruals, charge-offs and the adequacy of loan and unfunded-commitment allowances.
- Assess the duration and potential capital implications of unrealized securities losses, alongside management’s stated ability and intent to hold securities.
- Confirm the timing and final cost of the pension-plan termination and the persistence of higher operating expenses and reduced bankcard and SBA-related income.