First Bancorp, Inc quarterly report, Q3 FY2023

First Bancorp, Inc. — Form 10-Q Summary

Business context and reporting period

The First Bancorp, Inc. is a financial holding company that owns First National Bank, serving primarily Maine markets with limited lending exposure outside the state. This Form 10-Q covers the quarter and nine months ended September 30, 2023. The interim financial statements were reviewed, not audited, by BerryDunn. Common stock trades on Nasdaq under FNLC.

Financial performance and key metrics

Metric	Q3 2023	Q3 2022	Nine months 2023	Nine months 2022
Interest income	$33.3 million	$24.0 million	$93.4 million	$66.0 million
Interest expense	$17.3 million	$4.6 million	$44.0 million	$9.3 million
Net interest income	$16.0 million	$19.4 million	$49.4 million	$56.7 million
Provision for credit losses	$(0.2) million	$0.4 million	$0.5 million	$1.3 million
Non-interest income	$3.9 million	$4.7 million	$11.3 million	$13.0 million
Non-interest expense	$11.0 million	$11.4 million	$32.6 million	$32.2 million
Net income	$7.5 million	$10.1 million	$22.8 million	$29.8 million
Diluted EPS	$0.67	$0.91	$2.06	$2.70
Tax-equivalent net interest margin	2.40%	3.14%	2.54%	3.17%

Nine-month net income declined 23.3%; Q3 net income declined 25.9%.
Nine-month return on average assets was 1.08%, compared with 1.54% in the prior-year period. Return on average tangible common equity was 14.97%, compared with 19.29%.
The non-GAAP efficiency ratio increased to 51.88% from 44.99% for the nine months and to 53.49% from 46.02% for Q3.
Cash flow from operating activities was $26.2 million for the nine months, compared with $32.4 million in 2022. Investing activities used $208.4 million, principally from a $165.3 million increase in loans. Financing activities provided $189.4 million, primarily from deposit growth. Cash and cash equivalents ended at $29.9 million.

Balance sheet, credit, debt and liquidity

Total assets were $2.94 billion at September 30, 2023, up 7.5% from December 31, 2022 and 7.6% from September 30, 2022.
Total loans were $2.08 billion, up 8.6% year-to-date and 11.9% year-over-year. Growth was concentrated in commercial real estate, commercial and industrial, municipal and residential term loans.
Total deposits were $2.60 billion, up 9.3% year-to-date and 9.7% year-over-year. Certificates of deposit increased to $1.01 billion, while low-cost deposits were broadly stable year-to-date but lower year-over-year. Estimated uninsured deposits were $480.5 million, or 18.5% of total deposits.
Borrowed funds were $83.0 million, down from $103.5 million at December 31, 2022 and $118.3 million at September 30, 2022. All borrowed funds were short term at September 30, 2023.
Management reported total contingent liquidity sources of $1.263 billion, or 43.4% of total assets, including $891.0 million of primary sources. The Bank had $47.1 million of BTFP borrowing capacity and had drawn nothing under the facility.
Shareholders’ equity was $226.7 million. The company declared a quarterly dividend of $0.35 per share; year-to-date dividends were $1.04 per share, representing a 50.0% basic EPS payout ratio.
The company’s total risk-based capital ratio was 13.76%, above the 10.0% well-capitalized threshold applicable to the Bank. Management’s capital plan and stress testing indicated continued well-capitalized status under the scenarios described.
Non-performing loans were $2.6 million, or 0.12% of total loans; non-performing assets were 0.09% of total assets. Total past-due loans were $2.0 million, or 0.10% of total loans.
The allowance for credit losses on loans was $23.3 million, or 1.12% of loans, compared with $16.7 million, or 0.87%, at December 31, 2022. Net loan charge-offs were $30,000 for the nine months.

Material changes versus prior comparable periods

Net interest income fell primarily because deposit and other funding costs rose substantially faster than asset yields. Interest expense increased 374.5% year-over-year for the nine months, while interest income increased 41.5%.
Management identified approximately $1.1 million of 2022 PPP revenue as non-recurring; excluding that item, the year-over-year decrease in net interest income was 11.2% rather than 12.9%.
Non-interest income decreased 13.0% for the nine months. Mortgage banking revenue declined 50.5% because of lower mortgage volume and negative mortgage-servicing-rights valuation marks. Debit card income declined 21.3%, primarily because of the timing of program incentive payments.
Non-interest expense increased 1.2%. Higher FDIC insurance premiums were largely offset by lower salaries and employee benefits and lower other operating expense.
The company adopted CECL on January 1, 2023. The adoption increased the loan allowance by $6.2 million, the HTM securities allowance by $438,000 and the off-balance-sheet commitment reserve by $1.3 million, reducing retained earnings by $6.3 million after tax.
Unrealized losses on available-for-sale securities, net of tax, increased to $53.9 million from $44.7 million at year-end 2022. Management attributed the losses primarily to interest-rate and market-spread changes and stated that it had the intent and ability to hold the securities for recovery or maturity.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide formal earnings, revenue or margin guidance. Management expects interest rates to increase slightly over the next year and considers the current interest-rate risk position acceptable. Interest-rate simulation indicated that a gradual 2.0% increase in short-term rates would reduce first-year net interest income by approximately 4.8%; a gradual 2.0% decrease would increase it by approximately 2.8%. These are hypothetical sensitivity analyses, not forecasts.

Management described asset quality as strong and stable, but noted that future allowance increases could be required if non-performing loans, economic risks or portfolio growth increase.
Risks include higher-for-longer interest rates, deposit repricing and runoff, commercial real estate weakness, economic recession, market disruption following regional-bank failures, geopolitical instability related to Russia/Ukraine and the Middle East, and changes in loan collectability and securities values.
Commercial real estate, construction and hotel/motel exposure require monitoring. Hotel and motel loans totaled $226.4 million, or 10.88% of total loans. Construction, land and land-development loans represented 37.3% of Bank capital, below applicable regulatory guidance.
The investment portfolio had $144.1 million of unrealized losses at September 30, 2023, including $137.0 million in securities held in a continuous loss position for 12 months or more. Management recorded no related credit-loss allowance for AFS securities.
Four residential mortgage loans totaling $459,000 were in foreclosure. No commercial loans were in foreclosure, and there was no OREO balance.
Loans modified for borrowers experiencing financial difficulty during Q3 totaled $523,000, consisting of temporary payment deferrals.
Management reported effective disclosure controls and no material change in internal control over financial reporting. No material legal proceedings or material changes to previously disclosed risk factors were reported.

Most important facts for investors to verify

Whether deposit pricing, certificate-of-deposit growth and funding costs continue to compress net interest margin.
The sustainability and credit performance of rapid loan growth, particularly commercial real estate, hotels and multifamily exposures.
Whether the $23.3 million CECL allowance adequately covers future losses under weaker economic or commercial real estate conditions.
The extent to which unrealized securities losses affect tangible capital, liquidity flexibility or future earnings if securities must be sold.
Deposit concentration, uninsured deposits and reliance on wholesale CDs and other contingent funding sources.
Future dividend capacity, capital retention and the Bank’s ability to continue upstreaming dividends to the holding company.