The First Bancorp, Inc. (NASDAQ:FNLC) is a Maine-based bank that operates through 17 full-service banking offices in Lincoln, Knox, Waldo, Penobscot, Hancock, and Washington counties in the Mid-Coast, Eastern, and Down East regions of Maine. The company was formerly known as First National Lincoln Corporation and changed its name to The First Bancorp, Inc. in April 2008. With $2.5 billion in total assets by YE 2021, the bank delivered an 8% CAGR in asset growth since FY16.
First Bancorp is a real estate lender with ~40% real estate mortgages and ~30% CRE-related loans. The last two years of significant earnings growth are somewhat fueled by the solid performance of its mortgage business. On a normalized basis, mortgage volume is expected to wane this year, and earnings coming from mortgage-related fee income will likely decline as well.
Similar to other Northeast located banks, First Bancorp relies heavily on time deposits to fund operations. The challenge associated with time deposits is that depositors can shop for rates. While the bank has made progress in reducing reliance on time deposit and low-cost deposit is growing, the bank is still a long way from being as competitive as a Midwestern bank from a cost of financing’s perspective.
From a profitability perspective, ROA and ROE have been trending in the right direction. During Q4 21, The First Bancorp, Inc. reported ROA and ROE of 1.5% and 15.8%, respectively. The efficiency ratio is 55.6%. NIM is 3%.
Overall, NIM has been relatively stable in a declining rate environment but comparatively lower than industry peers. This is primarily driven by the bank’s relatively expensive funding cost. As mentioned earlier, with approximately ~30% of the deposit coming from time deposits, funding costs can be subjected to sensitive rate cycles.
Credit quality is sporadic in the bank’s history. NPL % of Total Loans were significantly higher than 100 basis points from FY17-F19, as the bank was working thru its problematic loan portfolio. During FY17-FY19, the macro-economic environment was benign. Other banks have not shown a systematic wave of default; given the bank’s ~40% loan book towards residential mortgages, which was relatively healthy, the real problem came from the commercial relationship. For the historical period, First Bancorp’s loan portfolio NPL percentage of loan underperform its peers, showing mid 50 basis points in terms of NPL percentage.
The bank is efficiently operated with historical non-interest operating expense tracking consistently to revenues from an efficiency perspective. At ~50% efficiency ratio, the metric is industry-leading.
(Note, 2021 loan portfolio breakdown is not available given that 10K has not been filed)
The bank is priced at 9.7x P/E and 1.6x P/TBV, which seems to be relatively attractively priced on the surface. However, when excluding $5 million in fee income on a normalized basis, the bank’s adjusted EPS will be reduced to $2.5/share and P/Adj. EPS will be ~13x, much less attractive than a ~10x P/E bank. With that, valuation is not highly attractive.
From a risk perspective, the bank is less asset sensitive than some other banks, with 77% of the loans being fixed-rate loans. As such, the bank is not as rate-sensitive from an asset perspective, if not liability sensitive, given its ~30% CD exposure. Moreover, as the mortgage market cools down, mortgage-related fee income will wane, so as loan growth from a residential mortgage perspective. Lastly, during a benign economic environment, the bank’s commercial underwriting capabilities were challenged from FY17-FY19. We are uncertain about the credit culture surrounding the bank.
From a reward perspective, the bank has consistently grown book value and dividends. The catalyst driving future growth is limited as most of the growth will be balance sheet related.
To sum up, the bank is priced at ~1.6x P/TBV and ~10x P/E. The P/E is deflated as driven by robust mortgage refinancing related fee income to a certain extent. Excluding the fee income of ~$5 million, our Adj. EPS is around $2.5 and P/Adj. EPS is ~13x. Assuming the bank will continue to grow at mid-to-high single digit, a 13x P/E is fairly priced. The lending solutions are somewhat commoditized and non-specialized; the cost of the deposit is unattractive for the bank to be an acquisition target. The bank has a history of underwriting credit that can be problematic. Despite being an efficient operator with 9% insider ownership, and some may argue that the bank can grow ~10% loan book per year in the future, our perspective is that the credit quality of a bank is paramount. The FY17-FY19 period is enough to ding from a banking investor’s point of view. Given the challenges associated with changing the credit culture of a bank and the broadly available opportunities in the community banking space, we are standing on the sideline for this opportunity.
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