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The First Bancorp (NASDAQ:FNLC) stock is a buy in our opinion under $30 right now. This is because bank stocks as a whole have been clobbered along with the overall market on fears of a possible recession, largely stemming from a massive inflation problem resulting in many American family budgets being stretched to the max. Gas is expensive. Food is expensive. Clothes. Rent. Even mortgage rates are now so high that the cost of buying a home has skyrocketed, or to finance a vehicle. Wages have not kept pace. It is hurting consumer confidence. To some degree, the increase in interest rates has temporarily hit demand for loans. Some banks are still combating this environment well, and we believe First Bancorp is one of them. We believe there is risk to the upside from $29 a share. Right now, we want to discuss the key metrics you should be aware of on this name. Although we are mildly bullish here, we think you should selectively enter the name as the market allows. This is a well-run bank with a nice dividend that can generate solid returns for your portfolio in the coming years.
Nice dividend increase from First Bancorp
FNLC stock is a buy with a safe dividend that is now yielding over 4.5%. The dividend was just raised 6.3% two weeks ago to $0.34 quarterly. That is a handsome payout to wait for a turnaround. This hike comes on the back of mostly improving performance as evidenced in Q1.
Headline earnings strength
With Q1 2022 revenues of $22.85 million, the bank saw a strong 8% increase in this metric year-over-year. This was a result of increased loan and deposit activity. We also note strong performance on earnings and it needs to be stated. We were pleased to see revenues grow which helped fuel earnings that once again set a new record for the company.
Earnings set a new Q1 record as net income was $9.7 million or $0.88 per share. This compares to net income of $8.9 million, or $0.81 per share, for the same period in 2021. We think 2022 will start to see more strength in the second half, after Q2 is reported. We think Q2 will reflect a weaker situation when the bank reports, and that is why the stock is down. Still longer term, we see trends for banks improving.
FNLC’s book value improved
FNLC stock is somewhat expensive at $29.65 relative to the book value per share on March 31, 2022. Book value per share to end the quarter was $21.19, compared with $20.17 a year ago. Further, tangible book value also improved to $18.39, up 2% from last year. We think that if you get shares around $27-$28, perhaps if the market gets volatile and sells off one last time in this bear market again, that would be a very attractive price, even if it is at a premium to book. Much of the book value move came from movement in loan and deposits, as well as asset quality.
Loans and deposit growth
Growth in loans and deposits is critical for any bank, small or large. The bank takes in deposits at a low interest rate, and lends at a higher one. This model has worked for centuries. The bank then profits on the spread, or the so-called net interest margin. This is why a rising rate environment will ultimately be good for the banks. Right now, they are dealing with a little rate shock as borrowers have slowed demand somewhat or loans as they adjust to rates being so high. That said, the company is growing deposits and issuing more loans.
Total deposits at the end of the quarter were $2.16 billion, up from $2.12 billion to start the quarter. Total loans ballooned to $1.71 billion, up from $1.65 billion to start the quarter. This is strong growth for this regional bank, while other banks are seeing loan activity falter. But we should have a sense of asset quality.
Asset quality
Asset health is a key indicator. We do not want to see loans increase if we are seeing non-performing loans skyrocket, or if we are seeing massive provisions for loan losses. Well, First Bancorp is not dealing with these issues, and for that reason, we really like buying the stock here with its high yield. The provision for loan losses totaled $0.45 million in the quarter, compared with $0.53 million a year ago, so some improvement here, although it’s a reversal from a credit provision to start the year. The allowance for loan losses was 0.92% of total loans at the end of the quarter, down from the 0.94% of total loans at the start of the quarter and down from 1.09% a year ago. This is a great trend to see.
Looking more into the asset health, we find that the ratio of non-performing assets to total assets was 0.20%, down from 0.23% to start the quarter. That is a positive. Net charge-offs were just 0.05% of total loans in the quarter. This is phenomenal quality.
Looking ahead
As we look ahead, the bank is in a really strong capital position with an estimated total risk-based capital ratio of 14.22%, and an estimated leverage capital ratio of 8.96%. These metrics are both strong and were 14.83% and 8.54%, respectively, last year. The bank now has 18 branches and is a slow grower. With higher rates, we expect better margins to fuel earnings power. Higher interest income from loans along with lower funding led to a 17.3% increase in net interest income. Net interest margin was 3.24% for the first quarter of 2022, up from 2.99% a year ago. This bodes very well. And yet, the stock is lower. We think you should be buying here as rates will remain high. While the banks may see a dip in Q2 and Q3 lending, we expect lending ramps back up as we get into 2023 and look past any talk of recession.
Final thoughts here
With a dividend yield of over 4.5% and strong asset quality trending in the right direction, we think you can buy on a pullback.
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