First Bancorp, Inc. 2023 Q1 Form 10-Q Summary
Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company whose principal subsidiary is First National Bank. The filing covers the unaudited three months ended March 31, 2023, with comparisons to March 31, 2022 and December 31, 2022. The Bank primarily serves Maine customers through commercial, residential, municipal, consumer, wealth management, mortgage banking and deposit activities.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net interest income | $17.5 million | $18.6 million | Down 6.1% |
| Net interest income, tax-equivalent | $18.1 million | $19.2 million | Down 5.6% |
| Provision for credit losses | $550 thousand | $450 thousand | Up $100 thousand |
| Non-interest income | $3.6 million | $4.2 million | Down 15.7% |
| Non-interest expense | $10.9 million | $10.7 million | Up 1.9% |
| Net income | $8.0 million | $9.7 million | Down 17.9% |
| Diluted EPS | $0.72 | $0.88 | Down $0.16 |
| Tax-equivalent net interest margin | 2.78% | 3.24% | Down 46 basis points |
| Return on average equity | 13.61% | 15.96% | Lower |
| Non-GAAP efficiency ratio | 49.98% | 45.42% | Higher |
Total interest income increased 40.8% to $28.9 million, driven by loan growth and higher rates, but interest expense increased 498.0% to $11.4 million as deposit pricing rose. Pre-tax, pre-provision net income was $10.2 million, compared with $12.2 million in the prior-year quarter.
Cash flow provided by operating activities was $5.0 million, while investing activities used $64.7 million, primarily reflecting a $68.2 million increase in loans. Financing activities provided $64.4 million, principally from a $142.0 million increase in certificates of deposit. Cash and cash equivalents increased to $27.5 million from $22.7 million at December 31, 2022.
Balance Sheet, Liquidity and Capital
- Total assets were $2.812 billion, up 2.7% from December 31, 2022 and 10.3% from March 31, 2022.
- Total loans were $1.983 billion, up 3.6% year to date and 16.1% year over year. Growth was concentrated in commercial real estate, commercial and industrial, municipal and residential portfolios.
- Total deposits were $2.467 billion, up 3.7% year to date and 14.3% year over year. Certificates of deposit increased to $1.010 billion, while lower-cost demand, NOW and savings deposits declined.
- Borrowed funds were $83.9 million, down from $103.5 million at December 31, 2022 and $133.7 million at March 31, 2022.
- Estimated uninsured deposits were $404.5 million, or 16.4% of total deposits.
- Management reported $830.0 million of primary contingent liquidity, or 29.9% of total assets, and total stated liquidity sources of $1.238 billion, or 44.5% of total assets. The Bank had $47 million of additional BTFP borrowing capacity and had drawn none as of March 31, 2023.
- Shareholders’ equity was $228.5 million. The Company’s total risk-based capital ratio was 13.72%, above the 10.0% well-capitalized threshold applicable to the Bank.
- A cash dividend of $0.34 per share was declared, representing a 46.58% basic EPS payout ratio.
Material Changes Versus Comparable Periods
- Net income declined primarily because higher funding costs more than offset higher interest income, while non-interest income also decreased.
- The net interest margin declined from 3.24% to 2.78%, partly because Q1 2022 included approximately $1.1 million of non-recurring PPP revenue.
- Non-interest income declined $663 thousand. Mortgage banking revenue fell 61.4%, debit card revenue fell 17.1% due partly to timing of incentive payments, and wealth management income fell 4.3%.
- The allowance for credit losses on loans increased to $23.5 million, or 1.18% of loans, from $16.7 million, or 0.87%, at December 31, 2022. Most of the increase resulted from adoption of the CECL standard.
- On January 1, 2023, CECL adoption increased loan reserves by $6.2 million, held-to-maturity securities reserves by $438 thousand and off-balance-sheet commitment reserves by $1.3 million. The after-tax impact reduced retained earnings by $6.3 million.
- Other comprehensive income was $1.4 million, compared with a loss of $18.3 million in Q1 2022, as the after-tax unrealized loss on available-for-sale securities improved by $4.2 million. The Company also recorded a $2.7 million after-tax unrealized loss on hedging derivatives.
Asset Quality, Outlook and Risks
- Asset quality remained strong: non-performing loans were $1.8 million, or 0.09% of loans; non-performing assets were 0.06% of total assets; and total past-due loans were 0.10% of loans.
- Net charge-offs were $25 thousand, or 0.01% of average loans, compared with $205 thousand, or 0.05%, in Q1 2022.
- The loan portfolio has exposure to Maine economic conditions, including tourism, commercial real estate, hotels and motels. Hotel and motel loans totaled $223.5 million, or 11.27% of total loans.
- Management expects interest rates to increase slightly over the next year and considers current interest-rate risk acceptable. Modeling indicated a projected 4.6% decline in first-year net interest income if rates rise gradually by 2.0%; management stated this remained within its policy limit.
- The Company holds substantial securities with unrealized losses. At March 31, 2023, available-for-sale securities in an unrealized loss position had fair value of $544.7 million and unrealized losses of $100.1 million. Management concluded the securities were fully collectible and had the intent and ability to hold them until recovery or maturity.
- Risks include deposit repricing and runoff, higher funding costs, recessionary conditions, inflation, regional bank failures, market volatility, geopolitical uncertainty, loan losses, collateral values and changes in interest rates.
- Six customer loan swap arrangements with aggregate notional value of $74.3 million referenced LIBOR tenors expected to continue through June 2023. The Company anticipated amending the contracts to replacement reference rates before LIBOR cessation.
- Management reported no material changes to previously disclosed risk factors, no reportable legal proceedings and effective disclosure controls as of March 31, 2023.
Important Facts for Investors to Verify
- Whether deposit migration from lower-cost accounts to CDs continues and how deposit pricing affects future net interest margin.
- Whether loan growth remains strong without a corresponding deterioration in delinquencies, non-performing loans or charge-offs.
- The adequacy of the CECL allowance, including the $23.5 million loan allowance and $1.4 million reserve for unfunded commitments, under changing economic forecasts.
- The extent and duration of unrealized securities losses and the Company’s ability to hold affected securities through recovery or maturity.
- Liquidity availability, uninsured deposit levels, wholesale funding dependence and any future use of BTFP or other borrowing facilities.
- The effect of interest-rate changes on funding costs, net interest income and the value of securities and derivatives.
- Completion and accounting treatment of the LIBOR-to-SOFR transition for legacy customer swap contracts.
- The sustainability of the $0.34 per-share dividend in light of earnings, capital requirements and regulatory limitations on Bank dividends.