The First Bancorp, Inc. — Fiscal 2023 Form 10-K Summary
Reporting period: Year ended December 31, 2023, with quarterly information for the fourth quarter of 2023. The company is a Maine-based financial holding company whose wholly owned First National Bank operates 18 offices in coastal and eastern Maine. The Bank serves individuals, small and medium-sized businesses, municipalities and other organizations through lending, deposits, mortgage banking, payment services, wealth management and trust services.
Key Financial Metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Total assets | $2.947 billion | $2.739 billion | Up 7.6% |
| Total loans | $2.129 billion | $1.915 billion | Up 11.2% |
| Total deposits | $2.600 billion | $2.379 billion | Up 9.3% |
| Net interest income | $65.2 million | $76.2 million | Down 14.4% |
| Tax-equivalent net interest income | $67.9 million | $78.5 million | Down 13.6% |
| Net interest margin | 2.49% | 3.15% | Down 66 basis points |
| Net income | $29.5 million | $39.0 million | Down 24.3% |
| Diluted EPS | $2.66 | $3.53 | Down 24.6% |
| Return on average assets | 1.03% | 1.49% | Down 46 basis points |
| Return on average tangible common equity | 14.50% | 19.15% | Down 465 basis points |
| Non-GAAP efficiency ratio | 52.43% | 45.96% | Higher by 647 basis points |
| Cash flow from operating activities | $36.9 million | $41.2 million | Down $4.3 million |
| Net cash used in investing activities | $199.8 million | $247.6 million | Lower use by $47.8 million |
| Net cash provided by financing activities | $172.1 million | $208.5 million | Down $36.4 million |
Fourth-Quarter Snapshot
Fourth-quarter 2023 net income was $6.7 million, compared with $9.2 million in the fourth quarter of 2022. Diluted EPS was $0.60 versus $0.83. Fourth-quarter net interest income was $15.9 million, provision for credit losses was $683,000, non-interest income was $4.1 million and non-interest expense was $11.2 million. Year-end total assets were $2.947 billion and shareholders’ equity was $243.1 million.
Material Changes Versus the Prior Comparable Period
- Higher Federal Reserve-related market rates and customer migration toward money market accounts and certificates of deposit increased funding costs faster than asset yields. Total interest expense rose 273.3% to $63.0 million, while tax-equivalent interest income increased 37.2% to $130.8 million.
- Low-cost deposits declined $95.1 million, while certificates of deposit increased $202.6 million, including growth in both local and wholesale CDs. The average cost of total deposits increased to 2.44% from 0.68%.
- Loan growth remained strong, led by commercial loans, residential term loans and municipal loans. Commercial, commercial real estate and commercial construction loans totaled $760.3 million, or 35.8% of loans, at year-end.
- Non-interest income declined 8.5% to $15.4 million, primarily due to a 42.9% decline in mortgage banking activity and a 15.2% decline in debit-card revenue. Wealth management revenue increased 1.2%.
- Non-interest expense was essentially stable at $43.8 million. Lower salaries and incentive compensation largely offset an $894,000 increase in FDIC insurance premiums.
- The company adopted CECL on January 1, 2023. The adoption increased the loan allowance by $6.2 million, increased the allowance for held-to-maturity securities by $438,000 and increased the off-balance-sheet credit reserve by $1.3 million. The after-tax reduction to retained earnings was $6.3 million.
- Accumulated other comprehensive losses improved as the after-tax unrealized loss on available-for-sale securities declined to $39.6 million from $44.7 million.
Credit Quality, Liquidity and Capital
- The allowance for credit losses on loans was $24.0 million, or 1.13% of loans, compared with $16.7 million, or 0.87%, at December 31, 2022. The 2023 provision for loan losses was $1.3 million, and net charge-offs were $233,000, or 0.01% of average loans.
- Non-performing loans were $2.2 million, or 0.10% of loans, versus 0.09% in 2022. Total past-due loans were $3.9 million, or 0.18% of loans, versus 0.08% in 2022. No other real estate owned was held at year-end.
- Total investment securities were $670.7 million. Available-for-sale securities had $50.4 million of unrealized losses, primarily attributable to higher market yields. Management concluded the securities were fully collectible and recorded no related allowance for credit losses.
- Primary contingent liquidity sources were $895.0 million, or 30.7% of assets. Including additional borrowing capacity and unencumbered collateral, total liquidity sources were estimated at $1.355 billion, or 46.5% of assets. No advances were outstanding under the Bank Term Funding Program.
- Borrowed funds were $69.7 million at year-end, consisting primarily of Federal Home Loan Bank advances and repurchase agreements. The company had no long-term borrowed funds outstanding.
- The Bank remained well-capitalized. Its total risk-based capital ratio was 13.62%, CET1 and Tier 1 ratios were 12.37%, and leverage ratio was 8.43%. The consolidated company ratios were 13.66%, 12.42%, 12.42% and 8.61%, respectively.
- Cash dividends declared were $1.39 per share, totaling $15.4 million, with a payout ratio of 51.87%. The company had no active share repurchase program.
Outlook, Management Commentary and Risks
Management described 2023 earnings as solid but below the record 2022 level. Management expects interest rates to remain flat or decrease during the next year and considers the company’s interest-rate risk acceptable. Internal modeling indicates that a gradual 2.0 percentage-point decline in short-term rates would increase first-year net interest income by approximately 3.7%, while a gradual 2.0 percentage-point increase would reduce it by approximately 6.0%. These are hypothetical sensitivity estimates, not forecasts.
- The principal near-term earnings risk is continued pressure on the net interest margin from elevated deposit pricing, deposit mix changes and wholesale funding costs.
- Loan concentrations include hotels and motels at $231.5 million, or 10.87% of loans, and lessors of residential buildings and dwellings at $217.5 million, or 10.21%. Commercial real estate, construction, tourism and Maine-specific economic conditions are key credit sensitivities.
- Management identified credit-loss estimation under CECL as a critical accounting estimate. Future changes in economic forecasts, loan growth, delinquencies, collateral values or charge-offs could require additional provisions.
- Approximately $689.6 million, or 64.44%, of certificates of deposit mature by December 31, 2024, creating a funding-cost and deposit-retention consideration.
- The company is exposed to interest-rate, liquidity, securities valuation, regulatory, cybersecurity, operational, climate-related and competitive risks. Management reported no material cybersecurity incident in the prior five years and no cybersecurity threat then known to be materially affecting the company.
- The company expects regular quarterly dividends to continue, but dividends remain subject to Board discretion, capital needs, financial performance and regulatory limits on dividends from the Bank.
- The new CRA rule becomes effective April 1, 2024, with compliance required beginning January 1, 2026. Management is reviewing its implications.
- There were no material pending legal proceedings, unresolved SEC staff comments, or reported changes in internal control effectiveness. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether deposit repricing and the large 2024 CD maturity schedule further compress net interest margin.
- Whether the strong 2023 loan growth can continue without a material increase in delinquencies, non-performing loans, charge-offs or CECL provisions.
- The sensitivity of hotel, multifamily and commercial real estate borrowers to weaker tourism, property values, refinancing conditions and a potential economic slowdown.
- The liquidity value and potential market impact of the company’s securities portfolio, including the $50.4 million of unrealized AFS losses and the $47.5 million of unrealized HTM losses.
- The sustainability of the $1.39 per-share dividend in relation to earnings, retained capital and regulatory restrictions on Bank dividends.
- The effect of future interest-rate changes, regulatory capital changes, CRA compliance requirements and FDIC insurance premiums on profitability and capital distributions.
- The assumptions underlying the CECL allowance, including the one-year forecast and one-year reversion periods, loss drivers, prepayment speeds and qualitative adjustments.