The First Bancorp, Inc. — 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 three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods. The interim financial statements were reviewed, but not audited, by Berry Dunn McNeil & Parker, LLC.
Key financial metrics
| Metric | Six months ended June 30, 2023 | Six months ended June 30, 2022 | Change |
|---|---|---|---|
| Total interest income | $60.1 million | $42.0 million | +43.2% |
| Interest expense | $26.7 million | $4.6 million | +474.6% |
| Net interest income | $33.4 million | $37.3 million | -10.5% |
| Tax-equivalent net interest margin | 2.62% | 3.18% | -56 basis points |
| Provision for credit losses | $0.7 million | $0.9 million | -$0.2 million |
| Non-interest income | $7.4 million | $8.3 million | -10.5% |
| Non-interest expense | $21.6 million | $20.8 million | +3.6% |
| Net income | $15.4 million | $19.7 million | -22.0% |
| Diluted EPS | $1.39 | $1.79 | -22.3% |
| Operating cash flow | $15.9 million | $19.3 million | -$3.4 million |
For the second quarter, net income was $7.4 million, or $0.67 diluted EPS, compared with $10.0 million, or $0.91 diluted EPS, in the prior-year quarter. Tax-equivalent net interest income was $16.6 million versus $19.3 million, and the tax-equivalent net interest margin was 2.46% versus 3.13%.
- Total assets were $2.875 billion at June 30, 2023, up 5.0% from December 31, 2022 and 9.3% from June 30, 2022.
- Total loans were $2.061 billion, up 7.6% year to date and 15.2% year over year. Growth was concentrated in commercial real estate, commercial and industrial, municipal, multifamily, and residential term loans.
- Total deposits were $2.500 billion, up 5.1% year to date and 11.0% year over year. Certificates of deposit increased to $1.050 billion, while demand, NOW, and savings deposits declined.
- Shareholders’ equity was $232.0 million. Book value per share was $20.94 and tangible book value per share was $18.15.
- Borrowed funds totaled $114.5 million, including $89.4 million of short-term borrowings and $25.1 million of long-term borrowings.
- Operating cash flow was $15.9 million; investing activities used $138.0 million, primarily because of the $146.4 million increase in loans; financing activities provided $124.5 million, primarily from certificate-of-deposit growth and long-term borrowings.
- The company’s total risk-based capital ratio was 13.66%, above the 10.0% well-capitalized threshold for the Bank. Management reported that the Bank met all well-capitalized regulatory ratios.
Material changes versus prior comparable periods
- Higher market interest rates and a shift toward higher-cost deposits caused interest expense to increase substantially, more than offsetting the increase in interest income. Management identified increased funding costs and the nonrecurring nature of approximately $1.1 million of 2022 PPP revenue as the principal drivers of lower net interest income.
- Non-interest income declined primarily because mortgage banking revenue fell 55.9% due to lower mortgage-sale volume and negative mortgage-servicing-rights valuation marks. Debit card income also declined because of the timing of incentive payments.
- Non-interest expense increased 3.6%; salaries and benefits declined, but other operating expense and FDIC insurance premiums increased.
- The company adopted CECL on January 1, 2023. The adoption increased loan allowance reserves by $6.2 million, held-to-maturity securities reserves by $0.4 million, and off-balance-sheet commitment reserves by $1.3 million, producing a $6.3 million after-tax reduction to retained earnings.
- The allowance for credit losses on loans increased to $23.5 million, or 1.14% of loans, from $16.7 million, or 0.87%, at December 31, 2022. The increase was primarily attributable to CECL adoption.
- Asset quality remained strong: nonperforming loans were $1.7 million, or 0.08% of loans, versus $4.8 million, or 0.27%, a year earlier. Total past-due loans were $2.8 million, or 0.14% of loans.
- The available-for-sale securities unrealized loss improved modestly to $43.8 million from $44.7 million at December 31, 2022, but remained a significant reduction to GAAP equity.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects interest rates to increase slightly over the next year and considers the company’s current interest-rate risk position acceptable. Interest-rate modeling indicated that a gradual 2.0% increase in short-term rates would reduce projected first-year net interest income by approximately 3.5%; a gradual 1.0% or 2.0% decrease was modeled to increase first-year net interest income by approximately 0.4% or 0.1%, respectively. These scenarios are not forecasts.
- Management identified inflation, Federal Reserve policy, potential recession, commercial real estate weakness, the Russia-Ukraine conflict, and disruption from 2023 regional-bank failures as risks that could adversely affect results.
- The securities portfolio had $551.0 million of fair value and $110.1 million of unrealized losses in securities positions at June 30, 2023. Management stated that it had the intent and ability to hold the securities and expected full contractual collection; no credit-loss allowance was recorded for the available-for-sale securities.
- Estimated uninsured deposits were $408.9 million, or 16.4% of total deposits. Management reported total liquidity sources of approximately $1.184 billion, or 41.6% of assets, including $773.0 million of primary contingent liquidity. No advances had been made under the Bank Term Funding Program.
- Commercial real estate and construction exposures require monitoring. Construction, land, and land-development loans represented 35.5% of Bank capital, while construction plus non-owner-occupied commercial real estate represented 217.0%, both below applicable regulatory guidance.
- Hotel and motel loans totaled $225.9 million, or 10.96% of total loans, representing the company’s only disclosed loan concentration above 10% of total loans.
- One property totaling $64,000 was classified as other real estate owned. No residential or commercial loans were in foreclosure at June 30, 2023.
- The company declared a quarterly dividend of $0.35 per share, compared with $0.34 in the prior-year quarter. No material legal proceedings or changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether deposit migration from low-cost accounts into certificates of deposit continues to pressure funding costs and net interest margin.
- Whether loan growth remains strong without a corresponding deterioration in commercial real estate, hotel, construction, or consumer credit quality.
- Whether the $23.5 million CECL loan allowance and $1.5 million off-balance-sheet reserve adequately cover future losses under changing economic conditions.
- Whether the $110.1 million of investment-security unrealized losses remain temporary and fully collectible, particularly if interest rates stay elevated or liquidity needs increase.
- Whether the company can maintain well-capitalized status and its dividend payout while funding continued balance-sheet growth.
- The assumptions underlying liquidity availability, uninsured deposit estimates, interest-rate sensitivity modeling, and fair-value measurements, all of which involve management judgment.