The First Bancorp, Inc. — Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022, with quarterly information provided through the fourth quarter. The First Bancorp is a Maine bank holding company whose wholly owned First National Bank operates 18 offices in coastal and eastern Maine. The Bank focuses on small-business, commercial, residential and consumer lending, deposits, payment services, and wealth-management activities.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net income | $39.0 million | $36.3 million | Up 7.5% |
| Diluted EPS | $3.53 | $3.30 | Up 7.0% |
| Tax-equivalent net interest income | $78.5 million | $68.6 million | Up 14.4% |
| Tax-equivalent net interest margin | 3.15% | 2.95% | Up 20 basis points |
| Non-interest income | $16.9 million | $19.4 million | Down 12.9% |
| Non-interest expense | $43.9 million | $42.1 million | Up 4.2% |
| Return on average assets | 1.49% | 1.48% | Improved |
| Non-GAAP efficiency ratio | 45.96% | 47.81% | Improved |
Net interest income benefited from loan growth and higher asset yields, partially offset by higher deposit costs. Mortgage banking revenue fell 72.8% as higher interest rates reduced refinancing activity. Debit-card income increased 21.9%, while wealth-management income increased 1.6% despite weaker market conditions.
Balance sheet, credit quality and capital
- Total assets increased 8.4% to $2.739 billion.
- Total loans increased 16.2% to $1.915 billion. Commercial loans, commercial real estate and commercial construction represented approximately 58.1% of total loans.
- Total deposits increased 12.0% to $2.379 billion. Low-cost deposits declined 2.3%, while certificates of deposit increased 53.2% to $867.7 million.
- Borrowed funds totaled $103.5 million at year-end, compared with $136.3 million in 2021. FHLB advances were $39.1 million and repurchase agreements were $64.4 million.
- Shareholders’ equity declined to $228.9 million from $245.7 million, primarily reflecting a $43.0 million after-tax unrealized loss on available-for-sale securities recorded in accumulated other comprehensive income.
- The allowance for loan losses increased to $16.7 million, or 0.87% of loans, from $15.5 million, or 0.94%.
- Non-performing loans declined to $1.8 million, or 0.09% of total loans, from $5.6 million, or 0.35%. Net charge-offs were $548,000, or 0.03% of average loans.
- Consolidated regulatory capital remained strong: total risk-based capital was 13.58%, CET1 and Tier 1 capital were 12.70%, and the leverage ratio was 9.01%. The Bank was classified as well-capitalized.
Cash flow, liquidity and shareholder returns
- Operating cash flow was $41.2 million, compared with $56.7 million in 2021.
- Investing activities used $247.6 million, primarily reflecting $267.6 million of net loan growth and securities purchases.
- Financing activities provided $208.5 million, primarily from a $301.5 million increase in certificates of deposit, partially offset by repayment of long-term borrowings and dividends.
- Cash and cash equivalents increased to $22.7 million from $20.6 million.
- Management reported $853.0 million of primary contingent liquidity and $1.274 billion of total liquidity sources, equal to approximately 47.0% of total assets. It believes funding sources are adequate for anticipated needs.
- The Company declared $1.34 per share of dividends for 2022, with a 37.64% payout ratio. The Bank declared $14.0 million of dividends to the parent.
Material changes versus the prior comparable period
- Earnings reached a record level, driven by loan growth and a wider net interest margin.
- Loan growth accelerated, while deposit composition shifted from low-cost deposits toward higher-cost local and wholesale certificates of deposit.
- Interest expense increased 56.5% to $16.9 million as deposit pricing rose; the average cost of interest-bearing deposits increased to 0.80% from 0.44%.
- Mortgage banking revenue declined sharply, while debit-card and wealth-management revenue increased.
- Investment securities experienced substantial interest-rate-related valuation declines. Unrealized losses totaled $111.7 million at year-end, compared with $8.4 million in 2021. Management concluded the securities were not other-than-temporarily impaired and expected to recover contractual principal and interest.
- Commercial real estate and other commercial lending increased materially, raising exposure to commercial real estate, tourism and hospitality conditions in Maine.
- The number and balance of troubled debt restructurings declined to 29 loans totaling $4.7 million from 60 loans totaling $8.3 million.
Outlook, management commentary and risks
Management expected interest rates to increase in 2023 and considered the Company’s interest-rate risk acceptable. Its simulation indicated that a gradual 2.0 percentage-point rate increase would reduce first-year net interest income by approximately 3.8%, within the Company’s 10% policy limit. These simulations are not forecasts and depend on assumptions regarding deposit behavior, loan growth, prepayments and pricing.
- The Company adopted the current expected credit loss methodology on January 1, 2023. Management expected a one-time increase in the allowance for credit losses, with no material adverse effect on earnings anticipated at adoption; the filing does not provide the ultimate adoption adjustment.
- Key risks include deposit repricing and runoff, reliance on certificates of deposit and wholesale funding, interest-rate volatility, unrealized investment-securities losses, commercial real estate concentration, Maine geographic concentration, and potential deterioration in tourism and hospitality borrowers.
- Economic slowdown, inflation, Federal Reserve policy, recession risk and reduced collateral values could increase credit losses and funding costs.
- COVID-19 loan modifications had been resolved by year-end, but management continued to identify possible economic effects from the pandemic and related government actions.
- Legacy customer swap contracts remained tied to LIBOR tenors expected to continue through June 30, 2023. The Company planned to amend those contracts to SOFR or another replacement index.
- The Company reported no material pending legal proceedings, no unresolved SEC staff comments, effective disclosure controls, and effective internal control over financial reporting. The independent auditor issued unqualified opinions; the allowance for loan losses was identified as the critical audit matter.
Most important facts for investors to verify
- The size and regulatory-capital impact of the January 1, 2023 CECL adoption adjustment.
- Whether deposit costs, certificate-of-deposit maturities and wholesale funding needs pressure net interest margin or liquidity.
- The market-value sensitivity and potential realization risk associated with the $111.7 million of unrealized investment-securities losses.
- Credit performance in the growing commercial real estate, commercial construction, hotel and motel portfolios.
- Trends in non-performing loans, charge-offs and the allowance coverage ratio following CECL adoption.
- Progress in transitioning the six legacy LIBOR-linked customer swap contracts.
- The sustainability of earnings after the sharp decline in mortgage banking revenue and amid higher operating and funding costs.